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 ticks rather than fractions of a dollar reduces trading costs without diminishing liquidity. I use Toronto Stock Exchange data following their switch to decimal trading on April 15, 1996. For stocks whose minimum tick was reduced from one-eighth of a dollar to five cents, decimalization reduced spreads. while liquidity was not adversely affected. Investors' trading costs and liquidity providers' profits declined on average, but trading volume did not increase. For stocks whose minimum tick size declined from 5 cents to 1 cent-decimalization had little impact on market quality. (C) 1997 Academic Press.