Over three-quarters of the responding traders report that they have altered trading strategies because of the decimalization mandate by the Securities and Exchange Commission (SEC) in early last year.
The NYSE and Nasdaq phased in implementation of this change in August 2000 and March 2001, respectively. According to the survey, the move has had a negative impact on both sell-side capital commitments and market liquidity.
Under decimalization, the incremental difference between the best price to buy a share and the best price offered to sell a share, known as the spread, was changed to one penny from one-sixteenth of a dollar.
Of those reporting a change in trading strategies,
- nearly 60% have opted to trade smaller orders,
- almost 50% have increased the use of limit orders, and
- more than 70% have made some changes in executing orders
In addition, more than 50% of respondents said that their trading costs, such as those for systems, compliance and administration had increased. The largest increase in costs however, was due to direct market impact, the degree to which an order affects the market price.
The results are based on the responses of nearly 100 buy-side traders at firms with between $500 million and $700 billion in assets under management.