Article1994

Trading Mechanisms and the Components of the Bid-Ask Spread

J. F. Affleck‐Graves · Shantaram P. Hegde · Robert E. Miller

177 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Stochastic processes and financial applications

Abstract

ABSTRACT We compare the relative magnitudes of the components of the bid‐ask spread for New York Stock Exchange (NYSE)/American Stock Exchange (AMEX) stocks to those of National Association of Securities Dealers Automated Quotations (NASDAQ)/National Market System (NMS) stocks. We find that the order‐processing cost component is smaller, and the adverse selection component is greater on the NYSE/AMEX trading systems than on the NASDAQ/NMS system. The inventory holding component is also greater for exchange‐traded stocks than for NASDAQ/NMS stocks, but this may be attributable to differences in the characteristics of the firms whose stocks trade on the respective systems.

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References

1985Continuous Auctions and Insider Trading 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1991Inferring Trade Direction from Intraday Data 1987Price, trade size, and information in securities markets 1983Information Effects on the Bid-Ask Spread 1988Estimating the components of the bid/ask spread 1988Liquidity and Market Structure 1981Optimal dealer pricing under transactions and return uncertainty

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2003Modeling the bid/ask spread: measuring the inventory-holding premium 1997Do Competing Specialists and Preferencing Dealers Affect Market Quality?2001Who's Informed? An Analysis of Stock Ownership and Informed Trading 1998Adverse selection and bid–ask spreads: Evidence from closed-end funds 2000Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets 2000Market Evidence on the Opaqueness of Banking Firms' Assets

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