THE DEGREE OF PRICE RESOLUTION AND EQUITY TRADING COSTS

This paper investigates relations between trade execution costs and pr ice-rounding practices for NYSE-and Nasdaq-listed firms. Execution cos ts on each exchange vary positively with the proportion of transaction prices and quotations rounded to even-eighths of a dollar, both cross -sectionally and intertemporally. After allowing for variation in mark et-making costs attributable to the private information content of tra des, there is a strong positive relation between execution costs and p rice-rounding frequencies for Nasdaq issues but not for NYSE issues. T hese findings are consistent with the assertion that price-rounding co nventions effectively increase trade execution costs on Nasdaq.