Abstract

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Reputation Effects in Trading on the New York Stock Exchange


Andrew Ellul


Indiana University - Kelley School of Business - Department of Finance

Robert H. Battalio


University of Notre Dame - Department of Finance

Robert H. Jennings


Indiana University - Kelley School of Business - Department of Finance

March 2005

AFA 2006 Boston Meetings Paper

Abstract:     
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, G24

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Date posted: March 17, 2005  

Suggested Citation

Ellul, Andrew and Battalio, Robert H. and Jennings, Robert H., Reputation Effects in Trading on the New York Stock Exchange (March 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=684091 or http://dx.doi.org/10.2139/ssrn.684091

Contact Information

Andrew Ellul (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Robert H. Battalio
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)
Robert H. Jennings
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

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