Limit Order Adjustment Mechanisms and Ex-Dividend Day Stock Price Behavior

Unlike the NYSE, the Toronto Stock Exchange (TSX) does not adjust prices in the outstanding limit orders on ex-dividend days. We find that TSX ex-day stock price behavior differs from that on the NYSE in several key aspects. In each case, the TSX ex-day behavior is consistent with the lack of a limit order adjustment mechanism. Our findings confirm that market microstructure is an important factor that contributes to the observed Canadian ex-day price behavior. Our findings also resolve the puzzle of the relatively small ex-day price drop in Canada.     

MARKET STRUCTURE AND TRADING VOLUME

Historically, trading volume reported for NASDAQ stocks has been overstated vis‐à‐vis New York Stock Exchange (NYSE) stocks, both because of the dealer's participation in trades as a market maker and because of interdealer trading. Beginning in 1997, the Securities and Exchange Commission changed order‐handling rules and trade‐reporting rules, which may have reduced or eliminated the overstatement of NASDAQ trading. We examine trading volumes of firms changing from NASDAQ to the NYSE since 1997 and document that reported trading volume for NASDAQ stocks continues to be overstated. Moreover, the degree of overstatement is much larger for firms with high trading volume.     

Location and excess comovement

Firms that switch from NASDAQ to the NYSE between 1988 and 2000 show an increase in the comovement of their order flows with aggregate NYSE order flow, and a decline in comovement with NASDAQ order flow. These changes in comovement are coincident with the switch, large relative to firms that remain on NASDAQ and the NYSE, and not explained by the growth in indexing over the sample period, a possible selection bias inherent in the decision to switch to the NYSE or a delayed response to cross-market information. Cross-sectional analysis shows that large, institutionally owned, value-oriented and dividend paying firms experience greater changes in comovement following the move to the NYSE. Our evidence is consistent with an important role for style investing in generating excess comovement, as in Barberis and Shleifer (2003).     

Why effective spreads on NASDAQ were higher than on the New York stock exchange in the 1990s

Two hypotheses have been advanced to explain why spreads on NASDAQ were substantially higher than those on the NYSE in the 1990s: “collusion” and “preferencing and payment for order flow.” We present data on all actively traded stocks in these markets of relative effective spreads (RES), aggregated monthly over 1987–1999 and advance a third hypothesis: NASDAQ “SOES-day-trading.” We estimate NASDAQ and NYSE informed-trade losses and gains to market makers and other liquidity providers on six trade sizes, and find that losses on trades we ascribe to SOES day traders were substantially greater than those on other trades, offset somewhat by gains from small-trade-size investors. NASDAQ market makers' response to these losses and additional operations costs incurred to reduce the losses resulted in greater RES and increased trading within the best quotes, predominantly on larger trade sizes. The data are consistent with the “SOES-day-trading” hypotheses, but not with the other two. Furthermore, the mandatory SOES “experiment” provides insights into the negative effects of automated trading systems (such as ECNs, which now dominate NASDAQ) when their design does not adequately consider opportunistic traders.     

MARKET STRUCTURE AND REPORTED TRADING VOLUME: NASDAQ VERSUS THE NYSE

Trading volume for common stocks is of interest to financial economists, investors, and securities lawyers. NASDAQ is a dealer market where trades with dealers are included in reported trading volume. This procedure does not accurately measure the trading volume by public buyers and sellers. Trading volume reported on the NYSE, which is primarily an auction market, provides a much closer measure of trades by public investors. We examine a sample of firms whose stock traded on the NASDAQ/NMS and subsequently on the NYSE. When trading switches to the NYSE, the firms' trading volume drops to about 50 percent of the volume previously reported on NASDAQ. A control group of firms that switched from the AMEX to the NYSE shows a small, but statistically insignificant, increase in trading volume.     

The Impact of Market Structure on Ex‐Dividend Day Stock Price Behavior

We explore the impact of market structure on the ex‐day price anomaly. Measuring the price‐drop ratio (PDR) as the ratio of the price change on the ex‐day to the dividend amount, we find that the average NASDAQ PDR is significantly less than one and significantly less than the New York Stock Exchange (NYSE) PDR. We then investigate a subset of firms that voluntary switch from NASDAQ to the NYSE and find that the PDR significantly increases after the switch, suggesting that market structure affects PDRs. We also create a matched sample and find that the NASDAQ PDR converges toward its matched NYSE counterpart, particularly after the introduction of SuperMontage. Our evidence is consistent with significant NASDAQ market structure changes reducing execution cost differences between the two exchanges and, in turn, reducing the PDR difference. Overall, our results highlight the important role market structure can play in understanding anomalies.     

Adverse selection costs for NASDAQ and NYSE after decimalization

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.     

TRADING COSTS AND QUOTE CLUSTERING ON THE NYSE AND NASDAQ AFTER DECIMALIZATION

We examine execution costs and quote clustering on the New York Stock Exchange (NYSE) and NASDAQ using 517 matching pairs of stocks after decimalization. We find that the mean spread of NASDAQ stocks is greater than the mean spread of NYSE stocks when spreads are equally weighted across stocks, and the difference is greater for smaller stocks. In contrast, the mean NASDAQ spread is narrower than the mean NYSE spread when spreads are volume weighted, and the difference is statistically significant for large stocks. Both NYSE and NASDAQ stocks exhibit high degrees of quote clustering on nickels and dimes, and quote clustering has a significant effect on spreads in both markets.     

SECURITY RETURN DISTRIBUTIONS AND MARKET STRUCTURE: EVIDENCE FROM THE NYSE/AMEX AND THE NASDAQ MARKETS

This paper documents significant and persistent deviations from normality in security return distributions for the NYSE, AMEX, and NASDAQ from 1974 to 1988. Controlling for January and size effects, we find that the deviations of security return distributions from normality decline with increasing portfolio size and investment horizon for the NYSE and AMEX, especially for daily returns. Deviations appear to be greater for the NASDAQ than for the two exchanges even for firms of the same size. Ratios of monthly to daily variances are also larger for the NASDAQ. These results suggest that nonparametric or other robust statistical techniques should be used when valuing equity options and other derivatives, especially when examining NASDAQ security returns. They further imply that trading strategies based on market inefficiencies are more likely to succeed on the NASDAQ.     

Liquidity in auction and specialist market structures: Evidence from the Italian bourse

Several studies find that bid-ask spreads for stocks listed on the NYSE are lower than for stocks listed on NASDAQ. While this suggests that specialist market structures provide greater liquidity than competing dealer markets, the nature of trading on the NYSE, which comprises a specialist competing with limit order flow, obfuscates the comparison. In 2001, a structural change was implemented on the Italian Bourse. Many stocks that traded in an auction market switched to a specialist market, where the specialist controls order flow. Results confirm that liquidity is significantly improved when stocks commence trading in the specialist market. Analysis of the components of the bid-ask spread reveal that the adverse selection component of the spread is significantly reduced. This evidence suggests that specialist market structures provide greater liquidity to market participants.     

Measuring abnormal daily trading volume for samples of NYSE/ASE and NASDAQ securities using parametric and nonparametric test statistics

We extend prior research on the empirical properties of daily trading volume and methods to detect abnormal trading volume in two ways. We compare the performance of a nonparametric test statistic with the parametric test statistic used in prior research and we study samples of NASDAQ securities as well as samples of NYSE/ASE securities. Prior research has focused exclusively on NYSE securities. We find the nonparametric test statistic is more powerful in detecting abnormal trading volume than the parametric test statistic in both samples of NYSE/ASE and NASDAQ securities. We also document that abnormal trading volume will be detected more often in samples of NYSE/ASE securities compared to NASDAQ securities.     

Regulation NMS and Market Quality

We show that both the quoted and effective spreads increased, the quoted depth decreased, and the market quality index decreased after the implementation of Regulation National Market System (NMS) (Reg NMS). We also find an increase in the price impact of trades and the dispersion of the pricing error after Reg NMS. The order execution speed is slower, the order fill rate is lower, and the order cancellation rate is higher for most trades after Reg NMS. Hence, contrary to the Securities and Exchange Commission's belief, Reg NMS has proven to be detrimental to most traders. NASDAQ provided faster and more reliable executions than the NYSE/AMEX, and NASDAQ gained market shares from the NYSE/AMEX and other trading venues after Reg NMS.     

Estimating bid-ask spread components: Specialist versus multiple market maker systems

This paper tests two competing hypotheses concerning the relationship between adverse selection costs on NASDAQ versus specialist-dominated exchanges. We reject the hypothesis that specialist-dominated exchanges have smaller adverse selection costs than exchanges with multiple market makers. We provide direct evidence on the timing differences between closing transactions and quotes as well as evidence on the extent of nontrading on the AMEX and NYSE but cannot reject the hypothesis that adverse selection costs are a function of average transaction size (which is generally larger on the AMEX and NYSE). We also provide insight into institutional differences across exchanges and the ISSM data base.     

Trading Mechanisms and the Components of the Bid-Ask Spread

We compare the relative magnitudes of the components of the bid-ask spread for New York Stock Exchange (NYSE)/American Stock Exchange (AMEX) stocks to those of National Association of Securities Dealers Automated Quotations (NASDAQ)/National Market System (NMS) stocks. We find that the order-processing cost component is smaller, and the adverse selection component is greater on the NYSE/AMEX trading systems than on the NASDAQ/NMS system. The inventory holding component is also greater for exchange-traded stocks than for NASDAQ/NMS stocks, but this may be attributable to differences in the characteristics of the firms whose stocks trade on the respective systems.     

Uncertainty,market structure,and liquidity

In this study we show that market uncertainty [measured by the Chicago Board Options Exchange Market Volatility Index (VIX)] exerts a large market-wide impact on liquidity, which gives rise to co-movements in individual asset liquidity. The effect of VIX on stock liquidity is greater than the combined effects of all other common determinants of stock liquidity. We show that the uncertainty elasticity of liquidity (UEL: percent change in liquidity given a 1% change in VIX) has increased around regulatory changes in the US markets that increased the role of public traders in liquidity provision, reduced the minimum allowable price variation, weakened the affirmative obligation of NASDAQ dealers, and abolished the specialist system on the NYSE.     

Characteristics and mechanisms of the U.S. stock market spillover effects on the Chinese A-share market: Evidence from 6 A-share broad-based and 31 sector indices

This study investigated the NYSE and NASDAQ composite indices' return and volatility spillover on 37 Chinese A-share indices. We used data from 2010 to 2022 with Multiplicative-Heteroskedasticity-GARCHX and rolling window analysis. We also applied a vector autoregression and impulse response analysis to study the relationship between the spillover effect and market return or volume condition. We found that: (1) the spillover effect of U.S. stocks can be quickly and mostly absorbed by the A-share market in the next trading day; (2) the dissimilarity of constituents among A-share indices contributes to the differences in the NYSE and NASDAQ spillover effects; (3) the spillover becomes more significant and prominent when the market performance is poor or when some special events occurred.     

The Dynamics of Security Trades,Quote Revisions,and Market Depths for Actively Traded Stocks

We examine the dynamics of return volatility, trading volume, and depth—in an intraday setting for a sample of actively traded NYSE and NASDAQ stocks. We show that depth is a useful intervening variable and mitigates the impact of trading activity on price volatility. Furthermore, depth is affected by the perception of prevailing information asymmetry between informed and uninformed traders. We demonstrate empirically that the NYSE supplies greater depth under conditions of high, perceived information asymmetry as compared to NASDAQ. NASDAQ makes up for this deficiency by its capability of managing large volume shocks without a major decline in depth.JEL Classification: C32, D82, G10     

Short-term market reaction after extreme price changes of liquid stocks

In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid–ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the `Omori law'. While on the NYSE the large widening of the bid–ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid–ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.     

The Operating Performance of Firms that Switch Their Stock Listings

In this article we examine the operating performance of stocks that switch from NASDAQ to the American Stock Exchange (AMEX) or the New Stock Exchange (NYSE) and from AMEX to the NYSE. Specifically, we investigate whether post‐listing operating performance is consistent with the reported negative long‐term drift of post‐listing stock returns and whether there is evidence of self‐selection of the listing time. We find evidence of negative post‐listing changes in operating return on assets and sales, which, on a match‐adjusted basis, are significant for the relatively small NASDAQ stocks switching to AMEX. We also find evidence that firms self‐select the time of listing changes.     

Tick size,NYSE rule 118, and ex-dividend day stock price behavior

Bali and Hite (1998) and Dubofsky (1992) propose models in which market microstructure effects play a role in the ex-dividend day price drop anomaly. Bali and Hite suggest that the anomaly is caused solely by price discreteness, while Dubofsky suggests that NYSE Rule 118 is also involved. We test these models by examining cum- to ex-day price drops during the one-eighth, one-sixteenth, and decimal tick size regimes. While the evidence is qualitatively consistent with Dubofsky's predictions, neither model is satisfactory in a quantitative sense. One of our main empirical findings is that no significant decline was evident in the magnitude of the ex-day anomaly after the tick size reduction.