Third Market Broker-Dealers: Cost Competitors or Cream Skimmers? |
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Authors: | ROBERT H. BATTALIO |
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Abstract: | This article compares the bid-ask spread for New York Stock Exchange (NYSE)-listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities (Madoff), begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant. |
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