Decimal Pricing : Nickel Markets

What would happen to bid-ask spreads and associated trade execution costs if stocks were priced in nickels, or even pennies? More broadly; are investors better off letting the market, rather than the marketplace, set the spread?On April 15, 1996 the Toronto Stock Exchange abandoned eighth fractions and introduced nickel pricing on all stocks priced above C$5. This research is first an extensive study of the effect of decimalization on spreads and execution costs on the TSE. Second, econometric models are fitted to the Canadian data. Third and most importantly, these models are applied to project the effect of decimalization on stocks trading on the NYSE and AMEX.Canadian average bid-ask spreads immediately narrowed more than 30%. Average trade execution costs decreased 28.5%. Annual savings amounted to C$216 million per year. U.S. NYSE and AMEX bid-ask spreads and trade execution costs are projected to decrease by a third, and are nearly halved for the Samp;P 500. The projected total savings: two cents a share and US$2.25 billion per year.The evidence is clear: Investors save a lot of money with nickel pricing and perhaps more with penny pricing. Competition in the bidding and offering of stock is best invigorated with minimal interference from the price increment