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Adverse selection costs for NASDAQ and NYSE after decimalization

  • Jiang, Christine X.
  • Kim, Jang-Chul
  • Wood, Robert A.
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    NYSE and NASDAQ completed their decimalization on January 29, 2001 and on April 9, 2001 respectively. In this paper, we compare adverse selection component of the bid-ask spread for NASDAQ and NYSE stocks after decimalization using the data from May 2001 and July 2001. We find that the adverse selection component of the bid-ask spread is significantly lower on NASDAQ than on NYSE, and these differences cannot be attributed to the differences in the characteristics of the stocks traded in the two markets. In addition, we find that the adverse selection costs increase with trade size on NYSE, however there is no monotonic pattern observed for NASDAQ stocks. Lastly, we report that although the order flows arrived in the two markets are significantly different, they can at best explain a small portion of the observed differences in adverse selection costs.

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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 18 (2009)
    Issue (Month): 4 (September)
    Pages: 205-211

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    Handle: RePEc:eee:finana:v:18:y:2009:i:4:p:205-211
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    1. Sugato Chakravarty & Robert A. Wood & Robert A. Van Ness, 2004. "Decimals And Liquidity: A Study Of The Nyse," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(1), pages 75-94.
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    5. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
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    9. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(04), pages 747-777, December.
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    12. Bacidore, Jeffrey & Battalio, Robert H. & Jennings, Robert H., 2003. "Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange," Journal of Financial Markets, Elsevier, vol. 6(3), pages 337-362, May.
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