Asked by Victoria Matthews Medina on May 27, 2024
Verified
What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?
A) The effective spread increased in 1997 but decreased in 2001.
B) The effective spread increased in both cases.
C) The effective spread decreased in 1997 but increased in 2001.
D) The effective spread decreased in both cases.
Effective Spread
The measure of the actual cost of a trading transaction, calculated as the difference between the executed trade price and the midpoint of the best bid and ask quotes at the time of the trade.
SEC
The U.S. Securities and Exchange Commission, a federal agency responsible for enforcing federal securities laws and regulating the securities industry.
Tick Size
The minimum price movement of a trading instrument in the market, which can affect the precision of price and order placement.
- Gain insight into the bid-ask spread and its components, including what impacts its extent.
Verified Answer
KR
Kayla RodriguezMay 30, 2024
Final Answer :
D
Explanation :
The effective spread decreased in both cases. By reducing the tick size, it becomes easier for traders to enter and exit positions, increasing liquidity in the market, and reducing spreads. As a result, the effective spread decreased in both 1997 and 2001.
Learning Objectives
- Gain insight into the bid-ask spread and its components, including what impacts its extent.