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Differences in individual NYSE specialists' performances and strategies

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  • Bülent Köksal

Abstract

This paper shows that there exist differences in the performances of individual NYSE specialists in terms of the execution costs and participation strategies to the posted quotes and trades. We find that quoted and effective spreads, quoted depth, and number of trades that receive price improvement differ significantly across individual specialists. The explanatory power of the model as measured by adjusted R2 increases when we include the individual specialist dummies. Evidence suggests that some of the differences across specialist firms documented in the previous literature are due to the differences in individual specialists. We find that, as the trading frequency increases, order processing costs increase for the portfolios of the individual specialists which implies that specialists use profits from active stocks to subsidize inactive stocks in their portfolios. Using 2001 NYSE System Order Data in the decimal pricing environment, we also show that individual NYSE specialists differ significantly in their participation strategies to the posted quotes and trades. This suggests that there are significant differences in execution costs between specialists because they use different quoting and trading strategies.

Suggested Citation

  • Bülent Köksal, 2010. "Differences in individual NYSE specialists' performances and strategies," Review of Financial Economics, John Wiley & Sons, vol. 19(1), pages 8-18, January.
    • Handle: RePEc:wly:revfec:v:19:y:2010:i:1:p:8-18
    DOI: 10.1016/j.rfe.2009.01.002
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    1. Bülent, Köksal, 2008. "Participation Strategy of the NYSE Specialists to the Trades," MPRA Paper 30512, University Library of Munich, Germany.
    2. Kenneth A. Kavajecz, 1999. "A Specialist's Quoted Depth and the Limit Order Book," Journal of Finance, American Finance Association, vol. 54(2), pages 747-771, April.
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    5. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
    6. Cao, Charles & Choe, Hyuk & Hatheway, Frank, 1997. "Does the Specialist Matter? Differential Execution Costs and Intersecurity Subsidization on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 52(4), pages 1615-1640, September.
    7. Gibson, Scott & Singh, Rajdeep & Yerramilli, Vijay, 2003. "The effect of decimalization on the components of the bid-ask spread," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 121-148, April.
    8. Harris, Lawrence E. & Panchapagesan, Venkatesh, 2005. "The information content of the limit order book: evidence from NYSE specialist trading decisions," Journal of Financial Markets, Elsevier, vol. 8(1), pages 25-67, February.
    9. Anand, Amber, 2005. "Specialist: The firm or the individual?: Empirical evidence from the options markets," Journal of Economics and Business, Elsevier, vol. 57(6), pages 555-575.
    10. Jay F. Coughenour & Daniel N. Deli, 2002. "Liquidity Provision and the Organizational Form of NYSE Specialist Firms," Journal of Finance, American Finance Association, vol. 57(2), pages 841-869, April.
    11. Barnea, Amir, 1974. "Performance Evaluation of New York Stock Exchange Specialists," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(4), pages 511-535, September.
    12. Robert Battalio & Andrew Ellul & Robert Jennings, 2007. "Reputation Effects in Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 62(3), pages 1243-1271, June.
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