THE IMPACT OF DECIMALIZATION ON MARKET QUALITY - AN EMPIRICAL-INVESTIGATION OF THE TORONTO STOCK-EXCHANGE

address the ''decimalization'' debate, i.e.. whether trading on cent t icks rather than fractions of a dollar reduces trading costs without d iminishing liquidity. I use Toronto Stock Exchange data following thei r switch to decimal trading on April 15, 1996. For stocks whose minimu m tick was reduced from one-eighth of a dollar to five cents, decimali zation reduced spreads. while liquidity was not adversely affected. In vestors' trading costs and liquidity providers' profits declined on av erage, but trading volume did not increase. For stocks whose minimum t ick size declined from 5 cents to 1 cent-decimalization had little imp act on market quality. (C) 1997 Academic Press.