Title

Order Preferencing and Market Quality on NASDAQ Before and After Decimalization

Document Type

Article

Publication Date

3-2004

Publication Source

Journal of Financial Economics

Volume

71

Issue

3

Inclusive pages

581-612

DOI

doi:10.1016/S0304-405X(03)00174-0

ISBN/ISSN

0304405X

Abstract

Despite the widely held belief that order preferencing affects market quality, no hard evidence exists on the extent and determinants of order preferencing and its impact on dealer competition and execution quality. This study shows that the bid-ask spread (dealer quote aggressiveness) is positively (negatively) related to the proportion of internalized volume during both the pre- and post-decimalization periods. Although decimal pricing led to lower order preferencing on NASDAQ, the extent of order preferencing after decimalization is higher than what prior studies had predicted. The price impact of preferenced trades is smaller than that of unpreferenced trades and preferenced trades receive greater (smaller) size (price) improvements than unpreferenced trades.

Keywords

Decimalization; Internalization; Payment for order flow; Quote aggressiveness; Spreads; Execution quality

Disciplines

Accounting