Trading Mechanisms and the Components of the Bid-Ask Spread

John Affleck-Graves, Shantaram P Hegde and Robert E Miller

Journal of Finance, 1994, vol. 49, issue 4, 1471-88

Abstract: The authors 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. They 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. Copyright 1994 by American Finance Association.

Date: 1994
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