NASDAQ Reports Smooth Sailing with Decimal Switch

June 13, 2001 ( - The NASDAQ filed its final report on decimalization with the SEC yesterday, claiming that liquidity for large institutional investors has not been hurt, and to some extent, has actually improved under the change.

“Institutional orders sent to brokers are just as likely to get filled after decimals as before, and trading costs do not appear to go up,” NASDAQ said in its report to the SEC.

The NASDAQ noted that trades have increased about 5% since the change, while overall volume is up 1%.

Spread Sliced

The NASDAQ’s report also noted that decimalization has cut spreads on the stocks traded by more than half, though that largely benefited retail investors. The average quoted spread for NASDAQ stocks fell 50.8% to 3.8 cents from 7.8 cents since the switch. More significantly, the spreads on the most-active stocks have plunged as much as 71%.

The spread is the gap between what a seller is willing to sell a stock for, and what a buyer is willing to pay. Prior to decimalization, the spread between the two on NASDAQ was at least 6.25 cents apart, rather than a penny.

NASDAQ noted that volatility has remained steady, despite the change. Quote volume has increased nearly 18%, but had not been a problem for the exchange’s systems.

Smaller investors see the greatest drop, with spreads on orders for blocks of 100 to 499 shares dropping to an average of 4 cents/share from an average 8.1 cents/share.

Institutional investors saw some benefit, though those buying in blocks of more than 10,000 shares enjoyed only a 3.8% drop.

The report noted anecdotally that retail investors “seem to prefer” submitting more market orders than before, but the number of limit orders – orders to buy at a particular price ? dropped.