Market changes and spread components, implications for international markets

Trading in international markets is changing and evolving due to competitive pressure and technological innovations. Evidence of changes are seen on the London Stock Exchange, Amsterdam Stock Exchange, the Swiss Exchange, and the Deutsche Borse. This paper examines changes in the components of Nasdaq spreads following the implementation of new Order Handling Rules in early 1997 and the reduction in minimum tick size from $0.125 to $0.0625 in June 1997. Trading volume increases and spreads decrease significantly following each change. We find that order processing and asymmetric information costs decline following each rule change. Inventory holding costs increase over the sample period. Also, we find a significant increase in the probability of a trade flow reversal after the implementation of the Order Handling Rules. © 2001 Elsevier Science Ireland Ltd