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A Cross-Market Comparison of Institutional Equity Trading Costs

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  • Louis K. C. Chan
  • Josef Lakonishok
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    Abstract

    We compare execution costs (market impact plus commission) on the New York Stock Exchange (NYSE) and on Nasdaq for institutional investors. The differences in cost generally conform to each market's area of specialization. Controlling for firm size, trade size and the money management firm's identity, costs are lower on Nasdaq for trades in comparatively smaller firms. For the smallest firms, the cost advantage under a pre-execution benchmark is 0.68 percent. However, trading costs for the larger stocks are lower on NYSE. For the largest stocks, costs are lower by 0.48 percent on NYSE. Given the extreme difficulty of controlling for variables other than market structure, however, comparisons of costs should be interpreted with extreme caution.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5374.

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    Date of creation: Dec 1995
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    Publication status: Published as "Institutional Equity Trading Costs: NYSE Versus Nasdaq", Journal of Finance, Vol. 52, no. 2 (June 1997): 713-735.
    Handle: RePEc:nbr:nberwo:5374

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    1. Madhavan, Ananth & Sofianos, George, 1998. "An empirical analysis of NYSE specialist trading," Journal of Financial Economics, Elsevier, Elsevier, vol. 48(2), pages 189-210, May.
    2. Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(3), pages 371-398, March.
    3. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1147-74, September.
    4. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 43(3), pages 617-37, July.
    5. Christie William G. & Huang Roger D., 1994. "Market Structures and Liquidity: A Transactions Data Study of Exchange Listings," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 3(3), pages 300-326, June.
    6. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1813-40, December.
    7. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 62(2), pages 211-35, April.
    8. Donald B. Keim & Ananth Madhavan, . "Execution Costs and Investment Performance: An Empirical Analysis of Institutional Equity Trades (Revised: 9-95)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 26-94, Wharton School Rodney L. White Center for Financial Research.
    9. Lee, Charles M C, 1993. " Market Integration and Price Execution for NYSE-Listed Securities," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 1009-38, July.
    10. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(2), pages 173-199, April.
    11. Marshall E. Blume & Michael A. Goldstein, . "Displayed and Effective Spreads by Market (Revision of 4-92)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 27-92, Wharton School Rodney L. White Center for Financial Research.
    12. Neal, Robert, 1992. "A Comparison of Transaction Costs between Competitive Market Maker and Specialist Market Structures," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 65(3), pages 317-34, July.
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    Cited by:
    1. C. V. Helliar & R. Michaelson & D. M. Power & C. D. Sinclair, 2000. "Using a portfolio management game (Finesse) to teach finance," Accounting Education, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(1), pages 37-51.

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