A Cross-Exchange Comparison of Execution Costs and Information Flow for Nyse-Listed Stocks

Posted: 21 Feb 1997

Date Written: December 1996

Abstract

We examine execution costs for trades in NYSE issues completed at the NYSE, the NASD stock market, and the regional stock exchanges during 1994. We find that while effective bid-ask spreads are only slightly smaller at the NYSE, realized bid-ask spreads, which measure market-making revenue net of losses to better-informed traders, are lower by a factor of two-to-three times. This differential is attributable to the successful "cream-skimming" of uninformed orders by off-NYSE market makers. These findings bolster existing concerns as to whether orders are routed so as to receive the best possible execution. Further, we question whether segmentation of the equity markets such that most price discovery occurs on the NYSE while most liquidity trades are diverted to competing markets can comprise a sustainable long-run equilibrium.

JEL Classification: G10, G18

Suggested Citation

Bessembinder, Hendrik (Hank) and Kaufman, Herbert Mark, A Cross-Exchange Comparison of Execution Costs and Information Flow for Nyse-Listed Stocks (December 1996). Available at SSRN: https://ssrn.com/abstract=8287

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Herbert Mark Kaufman

Arizona State University ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States
602-965-3131 (Phone)
602-965-8539 (Fax)

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