Trading costs for institutional investors declined by as much as 53% for NYSE stocks after decimalization in 2001, according to a new study by the Government Accountability Office. The GAO analyzed data from three major trade analysis firms: Plexus Group, Elkins/McSherry and Abel/Noser.
The GAO's analysis of Plexus data found that total trading costs fell after the market converted to decimal pricing, reaching 15.5 cents from 33 cents. For Nasdaq stocks, the decline was about 44%, dropping to about 14.4 cents from 25.7 cents.
In addition to analyzing the statistical data, GAO officials interviewed 23 institutional investing firms, which represent 31% of assets managed by the top 300 U.S. money managers. Most indicated that their trading costs had either declined or remained the same since decimalization.
"The extent to which decimal pricing is responsible for these improvements is not clear because other factors, including the multiyear downturn in stock prices that began in 2000, may have also contributed to the reduced trading costs," according to the report.
In addition, the move to pricing stocks in 1-cent ticks appears to have reduced market transparency and led to smaller order sizes, the report said.
"In part, institutional investors became less willing to display large orders to the markets because the 1-cent tick lowered the financial risks for other traders seeking to ‘step ahead' of these larger orders by entering orders priced just a penny better," according to the report. "Institutional investors told us that they had adapted to these new conditions by breaking up large orders into smaller lots and using electronic trading technologies to execute these smaller orders in the markets."