Trading Mechanisms and the Components of the Bid‐Ask Spread

  • Author(s): JOHN AFFLECK‐GRAVES, SHANTARAM P. HEGDE, ROBERT E. MILLER
  • Published: Apr 30, 2012
  • Pages: 1471-1488
  • DOI: 10.1111/j.1540-6261.1994.tb02462.x

ABSTRACT

We compare the relative magnitudes of the components of the bid‐ask spread for New York Stock Exchange (NYSE)/American Stock Exchange (AMEX) stocks to those of National Association of Securities Dealers Automated Quotations (NASDAQ)/National Market System (NMS) stocks. We find that the order‐processing cost component is smaller, and the adverse selection component is greater on the NYSE/AMEX trading systems than on the NASDAQ/NMS system. The inventory holding component is also greater for exchange‐traded stocks than for NASDAQ/NMS stocks, but this may be attributable to differences in the characteristics of the firms whose stocks trade on the respective systems.

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