Decimalization


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Decimalization

The quotation and trading of stock or bond prices in decimals, as opposed to fractions such as eighths.

Decimalization

1. The process of changing listings of security prices from fractions to decimals. Decimalization makes prices and the market easier for investors and laypeople to understand.

2. In the United Kingdom, the process of changing the calculation of the pound sterling to a decimal system. Prior to 1971, the UK had a very complex way of calculating subdivisions of the pound. Since then, the currency has been decimalized into 100 pence.

decimalization

The transition of security prices being quoted in decimals rather than fractions. Decimalization in U.S. markets started in fall 2000 with exchange-listed stocks and was completed in April 2001 with Nasdaq stocks. Studies during the transition indicated that moving to decimals benefited investors by reducing the bid-ask spreads.
References in periodicals archive ?
Bessembinder, H., 2003, "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis 38, 747-777.
Decimalization of tick Tick size for price quotations size completed on reduced from one-sixteenth to January 29, 2001 for the a penny.
More recent work has examined changes in market liquidity for NYSE-listed stocks since decimalization. Chakravarty et al.
Bessembinder (2003) studies a larger sample of NYSE and Nasdaq (National Association of Securities Dealers Automated Quotation) stocks and documents that following decimalization, bid--ask spreads fell noticeably, with the largest declines seen for the most actively traded stocks.
Even for those stocks trading only every five to ten minutes, average minimum spreads hover around 6.5 cents when the minimum tick size was 6.25 and fall to around 2 cents after decimalization.
For stocks in all categories, decimalization has led to a decline in average bid--ask spreads.
The narrowing of bid--ask spreads following decimalization illustrated in figures 1 and 2 has been accompanied by a decline in average depth at the posted prices.
The statistics reported in the previous section confirm that decimalization has led to both a decline in spreads and a decline in depth.
(6) The price impact of a trade in this framework is equal to the sum of the [[gamma].sup.i] coefficients during the pre-decimalization period and equal to the sum of the [[gamma].sub.i] + [[lambda].sub.i] coefficients after decimalization. Because purchases should put upward pressure on prices, I expect that [[gamma].sub.i] should be positive for some or all of the trade lags i.
These coefficients measure the price impact of a trade in the two weeks prior to decimalization. For instance, the first entry in the first column reports that the average price impact of a trade during this time is 9.2 basis points for stocks in the least actively traded category.
The last three columns summarize the results for the decimalization period.
The preceding results suggest that decimalization led to increased liquidity for virtually all stocks that trade at least once per minute.