Does Floor Trading Matter?
68 Pages Posted: 26 May 2020 Last revised: 7 Jan 2021
Date Written: January 7, 2021
While algorithmic trading now dominates financial markets, some exchanges continue to use human floor traders. On March 23, 2020 the NYSE suspended floor trading because of COVID-19. Using a difference-in-differences analysis, we find that floor traders are important contributors to market quality. The suspension of floor trading leads to higher effective and quoted spreads and larger pricing errors for treated stocks, relative to control stocks. Moreover, consistent with theoretical predictions about automation, the effects are strongest around the opening and closing auctions when complexity is highest. Our findings suggest that human expertise can complement algorithms in complex situations.
Keywords: Algorithmic trading, DMM, human trading, floor trading, liquidity, market making, market quality, price efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation