Information and Trading on Electronic Communications Networks

42 Pages Posted: 11 Nov 2002

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Tim McCormick

U.S. Securities and Exchange Commission

Date Written: February 18, 2002

Abstract

The differences between ECNs and Nasdaq market makers are used to formulate and test several hypotheses about the choice of trading venue and the importance of ECN trades in the price discovery process. Trades are more likely to occur on ECNs when spreads are narrow and when trading volume and stock-return volatility are high. Medium and large trades on ECNs have lower effective spreads than comparable market-maker trades, although this is not the case for small trades unless they occur on noninteger ticks. ECN trades have greater permanent price impacts than market-maker trades implying that informed trades are more likely to occur on ECNs. Overall, more private information is revealed through ECN trades than through market-maker trades even though more trades occur with market makers.

Suggested Citation

Barclay, Michael J. and Hendershott, Terrence J. and McCormick, Tim, Information and Trading on Electronic Communications Networks (February 18, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=342702 or http://dx.doi.org/10.2139/ssrn.342702

Michael J. Barclay (Contact Author)

University of Rochester - Simon School (Deceased)

N/A

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

Tim McCormick

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
United States
202-551-6633 (Phone)

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