Quote Competitiveness, 100-share Quotes, and Decimalization

Abstract

The finance literature documents a significant post-decimalization decline in intermarket quote competitiveness. We show that this result is due primarily to the decline in 100-share NBBO-matching quotes posted by NASDAQ. After decimalization, such quotes decline by more than 90%. At that time, the intermarket trading system (ITS) regards 100-share quotes as meaningless; these quotes are exempt from the trade-through rule and are generally ignored by ITS participants. We therefore argue that the major decline in quote competitiveness observedWe would like to thank Jeff Bacidore, Frank Hatheway, Tim McCormick, Robert Van Ness (the editor), and two anonymous reviewers for their comments and valuable suggestions. We are responsible for all remaining errors. C 2011, The Eastern Finance Association 89 90 N. Tang et al./The Financial Review 46 (2011) 89-101by previous research is largely nominal, and that decimalization had a much lesser impact on quote competitiveness than previously believed.

Order Routing Decisions for a Fragmented Market: A Review

“…The quote competition further weakens, and the competition among venues switches to best quote improvements. Tang et al (2011) further support Goldstein et al (2010) about the decline in the quote competitiveness and point out the reason is the reduction in the number of 100-share NBBO-matching quotes posted by NASDAQ. Garvey et al (2016) find that traders are more likely to route to off-exchanges venue after the decimalization as the cost aspect of routing decision is now marginalized.…”