The Value of the Floor

43 Pages Posted: 23 Jun 2009  

Daniel G. Weaver

Rutgers Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: May 12, 2009

Abstract

Existing theoretical literature suggests that floor trading has discernable benefits over electronic trading. In particular floor relationships lead to a reduction in asymmetric information and hence lower spreads. The ability of floor brokers to participate in incoming order flow without revealing their supply and demand curves increases total liquidity and dampens liquidity shocks leading to lower volatility. We develop hypotheses and test them on a sample of stocks that switch from floor trading to an electronic system with fairly identical rules and pre-trade transparency. We find strong support for existing theory and our hypotheses. In particular asymmetric information and volatility are significantly higher on the electronic system. This leads to an increase in investor transaction costs which dwarfs the operational cost advantages of the electronic systems. Our results are robust to test involving samples that control for company specific factors and market wide trends.

Keywords: Microstructure, Asymmetric Information, Trading Floor, Volatility, Transaction Costs

JEL Classification: G1, G14, G18

Suggested Citation

Weaver, Daniel G. and Zhou, Xing (Alex), The Value of the Floor (May 12, 2009). Available at SSRN: https://ssrn.com/abstract=1424492 or http://dx.doi.org/10.2139/ssrn.1424492

Daniel G. Weaver (Contact Author)

Rutgers Business School ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States
848.445.5644 (Phone)
732.445.2333 (Fax)

HOME PAGE: http://weaver.rutgers.edu

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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