Liquidity in auction and specialist market structures: Evidence from the Italian bourse |
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| Authors: | Alex Frino Dionigi Gerace Andrew Lepone |
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| Institution: | aFinance Discipline, Faculty of Economics and Business, University of Sydney, Sydney, NSW 2006, Australia;bSchool of Accounting and Finance, Faculty of Commerce, University of Wollongong, NSW 2522, Australia |
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| Abstract: | 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. |
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| Keywords: | Bid-ask spreads Quoted depth Liquidity |
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