Institutional Trading Costs on Nasdaq: Have They Been Decimated?

This paper uses unique order data to compare trading costs for institutional orders routed to Nasdaq sell-side dealers pre- and post-decimals. The results show that average execution-value-weighted trading costs have declined by 20 basis points compared to open mid-quotes, by 16 basis points compared to the quotes at order arrival (effective half-spreads), and by 1 basis point compared to mid-quotes at the close (realized halfspreads). The reduction in effective half-spreads represents a 22 percent reduction in average institutional trading costs, which corresponds to $69 million in total cost savings for one week’s worth of institutional orders. The results are robust to controlling for order, stock, trading, and dealer characteristics. Moreover, fill rates have improved and duration has not increased significantly. The paper also documents differences in trading costs by order type: effective half-spreads for market orders are now 52 basis points and for marketable limit orders 42 basis points, while limit orders enjoy a 46 basis point spread gain on average.