Breaking the Eighth: Sixteenths on the New York Stock Exchange

Abstract

On June 24, 1997, the New York Stock Exchange ended a two-hundred-year history of stocks priced in eighths. As part of a conversion to decimal pricing, the minimum price increment was halved to a sixteenth. Eighths were thought to have constrained against narrower bid-ask spreads and potentially lower trading costs. Indeed, in the first fifteen minutes of trading, average bid-ask spreads narrowed and trading costs declined dramatically. Trading cost savings were widespread for almost all trade sizes and across a large majority of stocks. Average savings were 1.25 cents per share, totaling $1.8 billion per year. As trading costs declined, the market flourished with record trading volume. There is no evidence that sixteenths caused higher market volatility. Remaining debate against smaller tick sizes should now be settled. The evidence is clear that trading costs are lowest with minimal interference from the pricing increment. On the NYSE, hundreds of actively traded stocks are still constrained against narrower spreads and lower trading costs by the 1/16 increment. In the upcoming decision on the decimal pricing increment, nickel pricing would be a small improvement; penny pricing would maximize improvement.