The Information Contained in Stock Exchange Seat Prices

Rodney L. White Center for Financial Research Working Paper Series 7-98

Posted: 29 Apr 1998

See all articles by Donald B. Keim

Donald B. Keim

University of Pennsylvania - Wharton School

Ananth Madhavan

BlackRock, Inc.

Abstract

Exchange seats are capital assets that confer access to the trading floor. As such, their prices reflect expectations about future activity and returns for the market as a whole. For this reason, the process by which seat prices are determined provides valuable information about beliefs of market participants who have the most intimate contact with the trading process. This paper examines the auction market for New York Stock Exchange (NYSE) seat using the complete intra-daily record of trades, bids and offers for the seat market for the 1973-1994 period. Our analysis yields several new results on the evolution of beliefs and their relation to asset prices. In contrast to traditional theories of bid-ask spreads that emphasize inventory costs or asymmetric information, we show that seat spreads reflect the heterogeneity of beliefs about future market performance. Our tests confirm that seat transactions and quotes do contain information about these beliefs, and our measure of divergence in opinion has predictive power regarding future stock market returns.

JEL Classification: G12

Suggested Citation

Keim, Donald B. and Madhavan, Ananth, The Information Contained in Stock Exchange Seat Prices. Rodney L. White Center for Financial Research Working Paper Series 7-98. Available at SSRN: https://ssrn.com/abstract=81330

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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