Are NASDAQ Stocks More Costly to Trade than NYSE Stocks? Evidence after Decimalization

Abstract

This paper examines execution costs and quote clustering on the NYSE and Nasdaq using 517 matching pairs of stocks after decimalization. We find that the average quoted, effective, and realized spreads of Nasdaq-listed stocks are 18%, 29%, and 58% larger, respectively, than those of NYSE-listed stocks. Stocks with a high proportion of even-sixteenth quotes prior to decimalization continue to show a high degree of quote clustering on nickel and dime quotes. Although quote clustering has a significant effect on both NYSE and Nasdaq spreads, the difference in spreads between the two markets is much larger than the level that can be accounted for by the differences in their stock attributes and quote clustering. Internalization and payment for order flow may still be responsible for the wider spreads of Nasdaq stocks.

Keywords: liquidity, spreads, decimal pricing, quote clustering

JEL Classification: G14, G18