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.     

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.     

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.     

Liquidity and Stock Exchange Listing

This study examines the pattern of stock price behavior for a sample of 71 firms that moved from NASDAQ and NASDAQ/NMS to the American Stock Exchange (AMEX) between 1982 and 1987. The study tests the liquidity gains hypothesis, which states that investors expect liquidity gains for the less liquid over-the-counter stocks but not for their more liquid counterparts after their listing on the AMEX. The results support the hypothesis by showing a significant difference between the two groups of stocks on the day the AMEX announced approval of the listing. Thus, companies with low liquidity are the largest beneficiaries of listing. The evidence provides little support for the anomalous negative pattern of returns during the post-listing period reported in previous studies.     

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.     

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.     

THE EFFECT OF THE 1986 TAX REFORM ACT ON EX-DIVIDEND DAY RETURN BEHAVIOR

In this study I examine whether the Tax Reform Act of 1986 has an effect on ex-date stock return behavior. Results indicate that the tax reform has a significant effect on ex-date returns for NASDAQ stocks, but not for NYSE/AMEX stocks. Further analysis suggests that the ex-date returns on NASDAQ stocks are primarily determined by the tax premium. However, the ex-date returns on NYSE/AMEX stocks are more influenced by short-term trading.     

THE OVER-THE-COUNTER MARKET AND NEW YORK STOCK EXCHANGE TRADING HALTS

This paper examines the over-the-counter (OTC) market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE). Unlike previous studies, we use transaction-to-transaction data on the NASDAQ during NYSE trading halts to investigate the price adjustment process between market equilibria. The evidence indicates that while being halted by the NYSE, the same stocks have exhibited significantly greater volatility in the OTC market. Since the volatile price movement is mainly random and provides no arbitraging opportunities for the OTC market traders, we do not find support for the proposal that trading halts should be mandatory for all trading locations.     

Determinants of the components of bid-ask spreads on stocks

In this paper we show that George et al. (GKN, 1991) estimators of the adverse selection and order processing cost components of the bid-ask spread are biased due to intertemporal variations in the bid-ask spread. We use alternative estimators that correct this bias and that are applicable to individual securities, and estimate these cost components empirically using data on NYSE/AMEX stocks. As expected, our results indicate that on average adverse selection costs account for approximately 50% of the bid-ask spread, sharply higher than the estimates of 8-10% obtained by GKN for NASDAQ stocks and 21% that we obtain for NYSE/AMEX stocks using GKN's estimators. We then conduct cross-sectional regressions designed primarily to determine whether adverse selection costs vary across specialists after controlling for firm size and other factors. Consistent with previously established hypotheses, we find that adverse-selection costs vary across specialists, and that this variation is related to the number of securities that the specialist handles.     

EXCHANGE LISTINGS AND DELISTINGS: THE ROLE OF INSIDER INFORMATION AND INSIDER TRADING

We examine whether insiders systematically exploit their private information before exchange listings and delistings they are likely to know about before outsiders/investors. Analyzing a comprehensive sample of over-the-counter (OTC) firms, which listed on the New York Stock Exchange (NYSE) or American Stock Exchange (AMEX) during 1977–93, we find evidence that insiders act on their private information of an impending exchange listing by purchasing or postponing the sale of stock on private account. For firms delisting from the NYSE or AMEX, we find that insiders of these firms sell stock on private account before delisting. Overall, the evidence indicates that insiders act on their private information before exchange listings and delistings.     

RECENT GROWTH IN NASDAQ TRADING VOLUME AND ITS RELATION TO MARKET VOLATILITY

We document a significant increase in Nasdaq trading volume relative to New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) trading volumes. Although recent increases in the number of shares traded are reported in the financial press, we also find it present in the percentage of dollar values traded. We then examine correlations between trading volume and several measures of market volatility. Nasdaq volume appears to be more closely correlated with residual variance, while NYSE and AMEX volumes are more closely correlated with overall market variance. We conclude that the type and quantity of information driving trading are different on Nasdaq than on the two exchanges, and that the relative growth in Nasdaq volume cannot be attributed solely to differences in the methods of counting volume in the two market environments.     

Momentum and the Disposition Effect: The Role of Individual Investors

We hypothesize that disposition effect-induced momentum documented in Grinblatt and Han (2005) should be stronger in stocks with greater individual investors’ presence since individual investors are more prone to the disposition effect. We find strong evidence for our hypothesis for a large sample of NYSE/AMEX/NASDAQ stocks from the end of 1980 to 2005. Our results hold across different momentum strategies using alternative ways of defining individual investors’ presence in a stock and maintain even after controlling for variables known to drive momentum. Furthermore, we find that our results are stronger for hard-to-value stocks consistent with the findings of Kumar (2009).     

The role of trades in price convergence: A study of dual-listed Canadian stocks

We examine the role of trades in restoring price parity for equities trading in multiple markets. Using a sample of stocks trading on the Toronto Stock Exchange and on the NYSE, AMEX or NASDAQ, we contrast price convergence when market makers (a) observe only lagged quotes from both markets and (b) also observe local order flow. Traditional error correction model estimates show that prices in the two markets adjust towards parity in response to quoted price discrepancies, meaning that observation of the cross-market quote helps restore parity. Including order flow in an augmented error correction model, we find that incremental price convergence occurs when trades are routed to the market with the better price, and the importance of quotes in the price convergence process is reduced. Cross-sectional analysis reveals that the importance of order flow in each market is decreasing in firm size and increasing in measures of liquidity. Our findings point to an important, and hitherto unexamined, role for trades in promoting inter-market price convergence.     

The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks

This paper analyzes the impact of US decimalization on the Canadian stocks listed on the Toronto Stock Exchange (TSE) and either the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotation System (Nasdaq) in the US. Using a sample of 126 firms, we find that the US trading of these stocks increases after decimalization, but this increase is not at the expense of TSE volume. Indeed, the TSE volume increases substantially for those securities that are traded on Nasdaq and increases marginally for those securities that are traded on the NYSE. Most of the increase in volume is in retail-sized trades. The bid–ask spreads and the quote depths decline on all exchanges, but by a greater amount in the US than in Canada. The depths on the NYSE decline from being above the TSE depths to well below the TSE depths. We also find that the decline in the TSE spread is directly related to the size of the firm and to the decline in the US spread, and is inversely related to the pre-decimalization ratio of spreads on the US exchange and the TSE. Overall, our results indicate that the US decimalization had the desired positive impact on trading in both the US and Canada, with a decrease in spreads and an increase in retail-sized trading.     

The Impact of Company Pre-Listing Attributes on the Market Reaction to NYSE Listings

This study examines the market behavior of common stocks transferring from the NASDAQ stock market to the New York Stock Exchange from 1982 to 1989. Using event study methodology, the study tests the joint liquidity-signaling hypothesis that a stock's pre-listing liquidity and earnings per share (EPS) growth (a proxy for signaling) affect the market behavior around NYSE listings. The results show that the market responds more favorably to stocks with low liquidity and high signaling than to stocks with high liquidity and low signaling before listing. Stocks in the former group do not have an anomalous pattern of negative post-listing abnormal returns.     

TRADING OF NASDAQ STOCKS ON THE CHICAGO STOCK EXCHANGE

We use a linear programming model to form two portfolios with approximately equal levels of attributes such as financial leverage. One portfolio comprises stocks that trade exclusively on NASDAQ and the other, stocks that trade on both the Chicago Stock Exchange (CSE) and NASDAQ (CSE/NASDAQ). We find that spreads are lower for the CSE/NASDAQ portfolio, but so is the percentage of quotes at spreads of $0.125. In fact, the lower spreads observed for the CSE/NASDAQ portfolio arise from fewer quotes with spreads of more than $0.25.     

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.     

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.     

Components of execution costs: evidence of asymmetric information at the Mexican Stock Exchange

Immediate execution costs for stocks trading at the auction market of the Mexican Stock Exchange (MSE) are five times higher than those for similar NYSE stocks. The source of the trading cost differential is asymmetric information. Mexican stocks are associated with a substantially larger asymmetric information component of the spread (2.76 cents per dollar) than their matched NYSE counterparts (0.28 cents). Results indicate that differences in asymmetric information are not related to stock characteristics, number and sophistication of security analysts, listing and disclosure requirements, ownership restrictions, and voting rights.     

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.