Decimal Move Shrinks Nasdaq ‘Spreads’ 51%

Nasdaq Stock Market trading spreads have narrowed by 51% since the second-largest U.S. stock market switched to decimal pricing three weeks ago, Nasdaq executives said.

“This is incredible; it blows my mind,” Nasdaq Chairman Frank Zarb said in an interview Monday after speaking to journalists at the Society of American Business Editors and Writers’ annual conference in New York. “It’s obviously a very good thing for investors.”

Nasdaq’s average weighted spread has narrowed to 3.8 cents from 7.8 cents since decimals were introduced, Nasdaq spokesman Andrew MacMillan said. Nasdaq spreads had narrowed by about a third since the Securities and Exchange Commission introduced order-handling rules on the market in 1997.

The spread measures the difference between the buying and selling prices of a stock and accounts for most of a dealer’s profit on a given trade. Nasdaq switched to trading in penny increments April 9. Previously, stocks were traded in fractions, with the smallest increment generally being a sixteenth of a dollar, or 6.25 cents.

Some institutional investors have complained that New York Stock Exchange specialists are exploiting their knowledge of investor orders to secure trades for their own accounts. The specialists have done so by placing orders at prices better than their customers’ best quotes, according to these complaints. The NYSE, which moved to decimal pricing Jan. 29, has formed a committee of traders and institutional investors to consider possible rule changes.

Nasdaq has found no evidence as yet that dealers are “stepping ahead” of customer orders, Zarb said.