Bid-Ask Spread Components in an Order-Driven Environment

Posted: 9 Feb 1999

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Dennis Y. Chung

Simon Fraser University


The purpose of this study is to extend the bid-ask spread decomposition literature into the order-driven environment. The use of electronic limit order books combined with order-driven market making has been increasing rapidly in recent years because of improvements in information technology and financial market deregulation. To date, reported bid-ask spread decompositions rely almost exclusively on quote-driven or hybrid systems. This study provides bid-ask spread component estimates from one of the world's largest order-driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar volume-based decile portfolios show significant cross-sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.

JEL Classification: G12, G14

Suggested Citation

Brockman, Paul and Chung, Dennis Y., Bid-Ask Spread Components in an Order-Driven Environment. Journal of Financial Research. Available at SSRN:

Paul Brockman (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Dennis Y. Chung

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6

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