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Has Decimalization Hurt Institutional Investors? An Investigation into Trading Costs and Order Routing Practices of Buy-side Institutions

By Sugato Chakravarty, Venkatesh Panchapagesan and Robert A. Wood


Comments Welcome. We thank the Plexus group, especially Vinod Pakianathan and Wayne Wagner, for providing us with the data and for related conversations, and the Nasdaq Economic Research Group for helpful suggestions. The usual disclaimer We examine the effect of decimalization on institutional investors using proprietary data. We find no evidence that decimalization has increased trading costs for institutions. In fact, we find an average decrease of 13 basis points, or roughly $224 million a month in savings of institutional trading costs following the move to decimal trading. We find little differences in institutional order routing practices overall though smaller and easier to fill orders are routed more often to electronic brokers while larger and more difficult to fill orders are sent to traditional brokers following decimalization. There is an increase in trading costs of orders routed to electronic and independent research brokers, while costs of trading with full service and soft dollar brokers have gone down. Interestingly, we find a reduced usage of soft dollar brokers suggesting that decimalization may have altered the incentives of this multi-billion dollar industry. Our results survive extensive partitioning of the data and differ in spirit from those reported around the transition of the minimum tick size from eighths to sixteenths. Our results are als

Year: 2011
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