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Specialists, Limit‐Order Traders, and the Components of the Bid‐Ask Spread

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  • Kee H. Chung
  • Bonnie F. Van Ness
  • Robert A. Van Ness

Abstract

This study compares the components of the bid‐ask spread estimated from quotes that reflect the trading interest of specialists with those estimated from limit‐order quotes and all available quotes for a sample of New York Stock Exchange (NYSE) stocks. The results show that the adverse selection component of the spread estimated from specialist quotes is significantly smaller than the corresponding figures from limit‐order quotes and entire quotes. We interpret this as evidence that NYSE specialists transfer at least a part of adverse selection costs to outsiders through the discretionary use of limit orders. Our results show that the estimation/interpretation of the components of the spread using quote data that include both specialist and limit‐order interests is problematic.

Suggested Citation

  • Kee H. Chung & Bonnie F. Van Ness & Robert A. Van Ness, 2004. "Specialists, Limit‐Order Traders, and the Components of the Bid‐Ask Spread," The Financial Review, Eastern Finance Association, vol. 39(2), pages 255-270, May.
    • Handle: RePEc:bla:finrev:v:39:y:2004:i:2:p:255-270
    DOI: 10.1111/j.0732-8516.2004.00075.x
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    References listed on IDEAS

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    1. 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.
    2. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    3. Demsetz, Harold, 1997. "Limit orders and the alleged Nasdaq collusion," Journal of Financial Economics, Elsevier, vol. 45(1), pages 91-95, July.
    4. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-1064.
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    Cited by:

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