Is the Adverse Selection Component Really Higher on the NYSE/Amex than on the Nasdaq?

Affleck–Graves, Hegde and Miller (1994) find that the adverse selection component of the bid–ask spread is higher for NYSE and Amex stocks than for Nasdaq stocks. Using the model of Huang and Stoll (1997), we revisit their study and find the opposite to be true – the adverse selection component is actually higher for Nasdaq stocks than for NYSE and Amex stocks. The economic magnitude of this additional adverse selection cost is very significant. Our results have important implications for the understanding of information production in dealer versus auction markets, and the costs of trading on such markets.