Tick Size and Institutional Trading Costs: Evidence from Mutual Funds

Nicolas P. B. Bollen and Jeffrey A. Busse

Journal of Financial and Quantitative Analysis, 2006, vol. 41, issue 4, 915-937

Abstract: This paper measures changes in mutual fund trading costs following two reductions in the tick size of U.S. equity markets: the switch from eighths to sixteenths and the subsequent switch to decimals. We estimate trading costs by comparing a mutual fund's daily returns to the daily returns of a synthetic benchmark portfolio that matches the fund's holdings but has zero trading costs by construction. We find that the average change in trading costs of actively managed funds was positive following both reductions in tick size with a larger and statistically significant increase following decimalization. In contrast, index fund trading costs were unaffected.

Date: 2006
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