On the Organizational Form of NYSE Specialist Firms
Posted: 7 May 1998
Date Written: Undated
We consider whether costs associated with specialist firm organizational form are relevant to the price formation process. Approximately 60% of the stocks traded on the NYSE are marketed by specialist firms whose specialists are principals in the firm, while the remaining 40% are marketed by specialist firms whose specialists are agents employed by the firm. We analyze this cross-sectional variation by focusing on how specialist firm organizational form is related to inventory holding costs, agency costs between specialist firms and floor traders, and agency costs between specialists and specialist firms. Using intraday trading and return data from over 2,000 NYSE stocks, we find that variables associated with inventory holding costs explain which type of specialist firm makes the market. Tests on stocks which were newly listed on the NYSE since January 1992 confirm the cross-sectional results. Our empirical results are consistent with economic theory suggesting that the type of specialist firm that markets a stock is explained by a tradeoff between inventory holding costs and agency costs. The results suggest that the organizational form of specialists may play a more significant role in the price formation process than previously considered.
JEL Classification: L23, G20, G32
Suggested Citation: Suggested Citation