Price rounding and bid-ask spreads before and after the decimalization

We investigate price rounding before and after the pilot decimalization on the NYSE. We find that although rounding exists in transaction, bid, and ask prices in both the pre- and postdecimalization periods, it becomes less salient after the decimalization. The cross-sectional relationship between rounding and trading variables is similar before and after the decimalization, and so is the relationship between execution costs and rounding when trading variables are held constant. More importantly, the quoted and effective bid-ask spreads decrease after decimal trading, and this decrease can be ascribed to the decrease in rounding frequency after controlling for the changes in trading variables.Copy 2003 published by Elisivier Inc.