COMPETITION IN NYSE-LISTED STOCKS: DO INVESTORS BENEFIT FROM HIGHLY COMPETITIVE MARKETS?
COMPETITION IN NYSE-LISTED STOCKS: DO INVESTORS BENEFIT FROM HIGHLY COMPETITIVE MARKETS?

Summary/Abstract: This paper investigates the changes of trading quality of 259 NYSE stocks from 2004 to 2008, a period when the NYSE faces fierce competition from other electronic-based liquidity providers. During our sample period, the NYSE market share decreased from 86.56% to 31.93% and the percentage of time that the NYSE provided both best bid and offer decreased from 92.40% to 34.70%. We find that although the competition increased significantly, the effective spreads and relative quoted spreads increased with the decrease of NYSE’s market share. In the mean-time, the liquidity providers’ revenue, measured by realized spreads, and short-term price volatility increased. Although the quoted depth increased and the price impact decreased when the markets became more competitive, we also find that the average number of shares per trade dropped from 586 shares to 190 shares, which indicates that the ability that a market can absorb a large-size trade decreases when markets are fragmented. Our findings suggest that the benefit from competition of the alternative trading systems is limited for NYSE stocks and shed a new light on whether competitive fragmented markets provide better trading quality than a consolidated floor-based market.

• Details
• Contents