Automation, Speed, and Stock Market Quality: The NYSE's Hybrid
Posted: 25 Mar 2011
Date Written: February 7, 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: Automation, Liquidity, Speed, Transparency, Latency, Adverse selection
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Terrence J. Hendershott
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States