Automation, Speed, and Stock Market Quality: The NYSE’s Hybrid

Hendershott, Terrence; Moulton, Pamela C.

doi:10.2139/ssrn.1159773

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Automation, Speed, and Stock Market Quality: The NYSE’s Hybrid

59 Pages Posted: 14 Jul 2008 Last revised: 8 Aug 2015

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Pamela C. Moulton

Cornell University - SC Johnson College of Business

Date Written: February 2, 2011

Abstract

Automation and trading speed are increasingly important aspects of competition among financial markets. Yet we know little about how changing a market’s automation and speed affects the cost of immediacy and price discovery, two key dimensions of market quality. At the end of 2006 the New York Stock Exchange introduced its Hybrid market, increasing automation and reducing the execution time for market orders from 10 seconds to less than one second. We find that the change raises the cost of immediacy (bid-ask spreads) because of increased adverse selection and reduces the noise in prices, making prices more efficient.

Keywords: Speed, Automation, Transaction Costs, Efficiency, Hybrid, NYSE

JEL Classification: G14

Suggested Citation: Suggested Citation

Hendershott, Terrence J. and Moulton, Pamela C., Automation, Speed, and Stock Market Quality: The NYSE’s Hybrid (February 2, 2011). Available at SSRN: https://ssrn.com/abstract=1159773 or http://dx.doi.org/10.2139/ssrn.1159773