Reputation Effects in Trading on the New York Stock Exchange
Indiana University Bloomington - Department of Finance
Robert H. Battalio
University of Notre Dame - Department of Finance
Robert H. Jennings
Indiana University Bloomington - Kelley School of Business
AFA 2006 Boston Meetings Paper
Theory suggests that reputations, developed in repeated face-to-face interactions, allow non-anonymous, floor-based trading venues to attenuate adverse selection in the trading process. We identify instances when stocks listed on the New York Stock Exchange (NYSE) relocate on the trading floor. Although the specialist follows the stock to its new location, most floor brokers do not. We use this natural experiment to determine whether reputation appears to affect trading costs. We find a discernable increase in the cost of liquidity in the days surrounding a stock's relocation. The increase is more pronounced for stocks with higher adverse selection and greater broker turnover. Using NYSE audit-trail data, we find that the floor brokers relocating with the stock obtain lower trading costs than those brokers who do not move and those that begin trading post-move. Together, these results suggest that reputation plays an important role in the liquidity provision process on the floor of the NYSE.
Number of Pages in PDF File: 45
Keywords: reputation, relationships
JEL Classification: G10, G20, G24working papers series
Date posted: March 17, 2005
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