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Reputation effects in trading on the New York Stock Exchange

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  • Battalio, Robert
  • Ellul, Andrew
  • Jennings, Robert

Abstract

Theory suggests that reputations, developed in repeated face-to-face interactions, allow nonanonymous, floor-based trading venues to attenuate adverse selection in the trading process. We identify instances when stocks listed on the New York Stock Exchange (NYSE) experience a non-trivial relocation on the trading floor for reasons unrelated to execution quality. Although the specialist follows the stock to its new location, most floor brokers do not. We use this natural experiment to determine whether reputation appears to affect trading costs. We find a discernable increase in the cost of liquidity in the days surrounding a stock’s relocation. The increase is more pronounced for stocks with higher adverse selection and greater broker turnover. Using NYSE audit-trail data, we find that the floor brokers relocating with the stock obtain lower trading costs than those brokers who do not move and those that begin trading post-move in the days surrounding the move. Together, these results suggest that reputation plays an important role in the liquidity provision process on the floor of the NYSE.

Suggested Citation

  • Battalio, Robert & Ellul, Andrew & Jennings, Robert, 2005. "Reputation effects in trading on the New York Stock Exchange," LSE Research Online Documents on Economics 24659, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24659
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    File URL: http://eprints.lse.ac.uk/24659/
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    Cited by:

    1. Desgranges, Gabriel & Foucault, Thierry, 2005. "Reputation-based pricing and price improvements," Journal of Economics and Business, Elsevier, vol. 57(6), pages 493-527.
    2. Buti, Sabrina, 2007. "A Challenger to the Limit Order Book: The NYSE Specialist," SIFR Research Report Series 55, Institute for Financial Research.
    3. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.

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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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