Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges

Abstract

A global trend towards automated trading systems raises the important question of whether execution costs are in fact lower than on trading floors. This paper compares the trade execution costs for the common stock of similar firms in an automated trading structure (Paris Bourse) and a floor-based trading structure (NYSE). Results indicate that execution costs are higher in Paris, and the difference is accentuated after the reduction in the minimum tick size on the NYSE in June 1997. Execution costs continue to be higher in Paris (14 basis points) than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples, and the cost differential appears to be economically significant. These results suggest that the present form of the automated trading system may not be able to fully replicate the benefits of human intermediation on a trading floor.

Keywords: Bid-ask spreads, stock markets, auction trading, electronic trading, ECNs

JEL Classification: G20