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Can the Treatment of Limit Orders Reconcile the Differences in Trading Costs between the Differences in Trading Costs between NYSE and Nasdaq Issues?

Published online by Cambridge University Press:  06 April 2009

Kee H. Chung ,
Bonnie F. Van Ness  and
Robert A. Van Ness
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Abstract

In this paper, we determine whether each bid (ask) quote reflects the trading interest of the specialist, limit order traders, or both for a sample of NYSE stocks in 1991. We then compare Nasdaq spreads with NYSE spreads that reflect the trading interest of the specialist. Our empirical results show that the average Nasdaq spread is significantly larger than the average NYSE specialist spread. We find that, on average, 49% of the difference between Nasdaq and specialist spreads is due to the differential use of even-eighth quotes between Nasdaq dealers and NYSE specialists. We also find that the NYSE specialist spread is significantly larger than the limit order spread, although NYSE specialists and limit order traders are similiar in their use of even-eighth quotes.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 2 , June 2001 , pp. 267 - 286
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Chung, School of Management, State University of New York (SUNY) at Buffalo, Buffalo, NY14260; Van Ness and Van Ness, Collage of Business Administration, Kansas State University, Manhattan, KS 66506. We are grateful to William Christie (the referee) for many valuable comments and suggestions. We also thank Jeffrey Bacidore, Hyuk Choe, Dosoung Choi, Lawrence Glosten, Michael Goldstein, Bong-Chan Kho, Inmoo Lee, Jae Ha Lee, Tim McCormick, Thomas McInish, Robert Wood, and seminar participants at the 1999 FMA Conference for useful comments and discussions. We are responsible for all errors.

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