Review of Quantitative Finance and Accounting, 15 (2000): 153±167
# 2000 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Impact of the Reduction in Tick Increments in
Major U.S. Markets on Spreads, Depth, and Volatility
BONNIE F. VAN NESS
Kansas State University
ROBERT A. VAN NESS*
Kansas State University, 117 D Calvin Hall, Manhattan, KS 66506
STEPHEN W. PRUITT
University of Missouri at Kansas City
Abstract. This study presents an analysis of the impact of the introduction of quotes in sixteenths of a dollar on
the AMEX, Nasdaq, and NYSE in mid-1997 on select market characteristics such as spreads, effective spreads,
quoted depth, and volume. The ®ndings of the study document reductions in the bid-ask spread, effective spread,
and a statistically signi®cant increase in the number of quotes. Interestingly, we ®nd that liquidity, as measured by
the total depth at the bid and ask, declines signi®cantly on the AMEX and NYSE, but increases on the Nasdaq.
Trading volume increases on the NYSE, but remains unchanged for the AMEX and Nasdaq. We also ®nd that the
proportion of even-increment quotes is a relevant factor affecting percentage spreads for Nasdaq both before and
after and for the NYSE only after the change in quoting increments.
Key words: tick size, trading costs, spreads
JEL Classi®cation: G14, G20
One of the most signi®cant and well-publicized changes in the security trading
environment to occur in the United States in recent memory was the move in 1997 of
all three of the major U.S. exchanges (AMEX, Nasdaq, NYSE) to trading in increments of
sixteenths of a dollar instead of the eighths that had been employed since before 1900.
While many governmental regulators and academic observers hailed the move to
sixteenthsÐor ``teenies'' as they are sometimes dubbed on the streetÐas a major step on
the road toward full decimal trading, the change was, perhaps not unexpectedly,
accompanied by considerable controversy.
Did mean quoted spreads signi®cantly decline following the imposition of trading in
sixteenths? Did the ®ner pricing grid result in an increase in the number of quotes and
trades? Is quoting occurring in the new quoting increments, or clustering around the eighth
quotes which people were accustomed? Did the overall depth of the markets decline as a
result of the change to sixteenths, as had been feared by some observers? Has the change,
*Corresponding author: Robert Van Ness, 117 D Calvin Hall, Manhattan, KS 66506; E-mail: firstname.lastname@example.org