| Abstract: | Relations between trade-size characteristics and the bid-ask spread are developed to distinguish among major theories of the spread. These trade-size characteristics are determinants of the spread for NASDAQ/NMS stocks. They explain much of the cross-sectional variation in the spread commonly associated with volume, volatility, and share price. Evidence shows that order-processing costs are dominant relative to inventory effects for low-price, small-capitalization, and low-volume stocks, but that the opposite is true for high-price, large-capitalization, and high-volume stocks. Inventory effects are more important relative to asymmetric information costs when stock price or capitalization is lower. |
