Competition Among Market Centers
48 Pages Posted: 8 Dec 2003
Date Written: December 2003
We examine competition among six market centers for NYSE-listed stocks using SEC Rule 11ac-5 data. We find that: market centers competing with the NYSE execute orders in only a subset of stocks, order types and order sizes, that differences in effective spreads are generally much smaller than suggested by comparisons of overall averages though reliable differences remain, that order flow routed to the NYSE is substantially more informed that order flow routed to broker-dealers and other exchanges (though less informed than marketable limit orders routed to ECNs), and that prevailing spreads differ at time of order arrival. More importantly, we find that differences in effective spreads between the NYSE and some market centers are related to characteristics of the stocks traded. Taken together, our results suggest that competition among market centers is imperfect and that some market centers carve out profitable niches in the stocks they trade and/or the orders they execute.
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