I address the “decimalization” debate, i.e., whether trading on cent ticks rather than fractions of a dollar reduces trading costs without diminishing liquidity. I use Toronto Stock Exchange data following their switch to decimal trading on April 15, 1996. For stocks whose minimum tick was reduced from one-eighth of a dollar to five cents, decimalization reduced spreads, while liquidity was not adversely affected. Investors' trading costs and liquidity providers' profits declined on average, but trading volume did not increase. For stocks whose minimum tick size declined from 5 cents to 1 cent, decimalization had little impact on market quality.Journal of Economic LiteratureClassification Numbers: G12, G15

I address the issue of how decimalization impacts the information acquisition decision of traders. I show that traders have less of an incentive to improve the quality of their information and, consequently, trades tend to be less informative following a reduction in the minimum tick. This result is consistent with the empirical finding that reductions in the minimum tick lead to declines in the adverse selection component, a finding counter to the theoretical predictions in the literature. This result also explains how the predicted savings from decimalization can exceed even total market maker profits. In addition, I show that even if market makers are perfectly competitive, a minimum tick can lead to multiple spread equilibria, some of which being more than one tick away from the underlying, or “no-tick”, equilibrium spread. Finally, I discuss the implications of the model for payment for order flow/internalization and the existence of an optimal tick size.

We examine how the intrinsic differences between U.S. and non-U.S. stocks affect market participants and the market quality of non-U.S. stocks relative to U.S. stocks. Using proprietary data on NYSE specialist trading, we find that, all else equal, specialist closing inventory positions for non-U.S. stocks are closer to zero than U.S. stocks. The evidence on specialist participation and stabilization rates is mixed. Non-U.S. stocks from developed markets have higher specialist participation and stabilization rates than U.S. stocks, while emerging market stocks have lower participation and stabilization rates than U.S. stocks. With respect to market quality, we find that, all else equal, non-U.S. stocks have wider spreads, less depth, and greater transitory volatility than U.S. stocks. We investigate the reasons behind the difference in liquidity and find that the larger non-U.S. spreads are primarily due to higher information asymmetry and increased adverse selection risk. We conclude that liquidity providers demand greater compensation for trading non-U.S. stocks, but this additional compensation is necessary to offset the higher adverse selection risk.

We examine the components of displayed (quoted) liquidity and the amount of non-displayed liquidity on the NYSE for a sample of non-US stocks. Consistently with prior work, non-US stocks have less displayed liquidity than similar US stocks. Extending prior research, we find that this is true both in the limit order book and on the floor. As Domowitz et al. [Domowitz, I., Glen, J., Madhavan, A., 1998. International cross-listing and order flow migration: Evidence from and emerging market. Journal of Finance 53, 2001–2027] posit, non-US stocks from transparent/linked home markets have more displayed NYSE liquidity when the home market is open but non-US stocks from opaque/non-linked home markets have more NYSE displayed liquidity when the home market is closed. Non-US and US stocks have similar supplies of non-displayed liquidity, consistent with the idea that the conditional nature of non-displayed liquidity allows NYSE traders to mitigate adverse selection problems inherent in trading non-US stocks. Our results imply that non-US stocks have less total (displayed plus non-displayed) liquidity than US stocks.