The value of the floor |
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Authors: | Daniel G Weaver Xing A Zhou |
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Institution: | (1) Department of Finance, Rutgers Business School, Rutgers, The State University of New Jersey, 94 Rockafeller Road, Piscataway, NJ 08854-8054, USA |
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Abstract: | Existing theoretical literature suggests that floor trading has discernable benefits over electronic trading. In particular
floor relationships lead to a reduction in asymmetric information and hence lower spreads. The ability of floor brokers to
participate in incoming order flow without revealing their supply and demand curves increases total liquidity and dampens
liquidity shocks leading to lower volatility. We develop hypotheses and test them on a sample of stocks that switch from floor
trading to an electronic system with fairly identical rules and pre-trade transparency. We find strong support for existing
theory and our hypotheses. In particular asymmetric information and volatility are significantly higher on the electronic
system. This leads to an increase in investor transaction costs which dwarfs the operational cost advantages of the electronic
systems. Our results are robust to tests involving samples that control for company specific factors and market wide trends. |
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