bank competition and ecb s monetary policy in a model of oligopolistic competition in the banking sector we analyse how the monetary policy rule chosen by the central bank can influence the incentive of banks to set high interest rates on loans over the business cycle we exploit the basic model to investigate the potential impact of emu implementation on collusion among banks in particular we consider the possible eaects of the european central bank s policy criteria with regard to the cost of credit in national markets 2000 elsevier science b v all rights reserved

clustering and competition in asset markets economists financial commentators regulatory agencies and the legal community have recently criticized the nasdaq stock market inc because there is greater clustering of stock quotations on even eighths on nasdaq than on the new york stock exchange or the american stock exchange a phenomenon which critics attribute to collusion or some other defect in nasdaq market structure however as this article demonstrates clustering occurs in varying degrees in many other incontestably competitive financial markets including the nyse the amex the london stock exchange the london gold market and the international foreign exchange market this article provides a competitive theory of clustering that emphasizes the effect of uncertainty the size of transactions volatility and the informational and transactional roles of quotations on the degree of clustering in addition the article examines how market structure can affect the degree of clustering and considers the relation between clustering spread

market structure and the intraday pattern of bid ask spreads for nasdaq securities this article examines the intraday pattern of bid ask spreads among nasdaq stocks we find that spreads are relatively stable throughout the day but narrow significantly near the close this contrasts with the u shaped pattern for nyse stocks reported by brock and kleidon and mcinish and wood we attribute these divergent patterns to structural differences between specialist and dealer markets the wider spreads for nyse stocks near periods of market closure may reflect the market power of specialists the decline in spreads near the close for nasdaq stocks is consistent with inventory control by individual dealers copyright 1995 by university of chicago press

third market reforms the overlooked goal of the sec s order handling rules in 1997 the securities and exchange commission enacted significant reforms in u s markets several studies document that the new order handling rules increased competition for nasdaq stocks but the reforms were designed with an additional goal in mind to increase quote competition for the trading of nyse listed securities on nasdaq i e third market trading an evaluation of the reforms in the third market indicates that they did not achieve this objective instead both quote quality and quoting frequency were diminished due primarily to elimination of the excess spread rule this suggests that more significant changes are needed to increase inter exchange competition

limit orders and the alleged nasdaq collusion abstract different methods are used by the nyse amex and the nasdaq to accomodate limit orders received from investors this accounts for at least part of the excess of nasdaq spreads over nyse spreads adjusted for trading volume and is a factor in determining this excess that is independent of collusion on the nasdaq the spread comparison evidence given by others to support their belief that there is collusion among market makers on the nasdaq therefore overstates the probability of collusion and its significance if it exists

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

joint production and substitution in timber supply a panel data analysis supply equations for sawlog and pulpwood were developed with a panel of data from 102 norwegian municipalities observed from 1980 to 2000 static and dynamic models were estimated by cross section time series andpanel data methods a static model estimated by first differencing gavethe best overall results in terms of theoretical expectations pattern ofresiduals prediction accuracy and parsimony the results showed thatsawlog supply responded positively to its own price elasticity e 0 91 0 07 but negatively to the pulpwood price e 0 22 0 06 the pulpwood supply responded positively to the price of both pulpwood e 0 53 0 06 and sawlogs e 0 20 0 07 sawlog and pulpwood supply had a common elasticity of 2 04 0 25 with respect to the growing stock and of 0 30 0 21 with respect to the interest rate the supply elasticity of substitution of sawlog for pulpwood with respect to their relative price was 0 74 0 04 policies to raise the annual harvest which is currently well

applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

minimum price variations discrete bid ask spreads and quotation sizes exchange minimum price variation regulations create discrete bid ask spreads if the minimum quotable spread exceeds the spread that otherwise would be quoted spreads will be wide and the number of shares offered at the bid and ask may be large a cross sectional discrete spread model is estimated by using intraday stock quotation spread frequencies the results are used to project 1 16 spread usage frequencies given a 1 16 tick projected changes in quotation sizes and in trade volumes are obtained from regression models for stocks priced under 10 the models predict spreads would decrease 38 percent quotation sizes would decrease 16 percent and daily volume would increase 34 percent article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

fragmentation versus consolidation of securities trading evidence from the operation of rule 19c 3 stock exchanges defend their rules requiring members to trade listed stocks on an exchange floor as a means of achieving consolidation of trading which it is argued minimizes trading costs to investors by virtue of the securities and exchange commission s rule 19c 3 however these exchange rules cannot apply to stocks newly listed after april 26 1979 the objective of the securities and exchange commission rule was to end what was viewed as restraint of desirable competition that would more than compensate for any cost saving resulting from consolidation by comparing the cost of trading measured by bid ask spreads and returns variance for the two distinct groups of stocks those listed before april 26 1979 and those listed after we test these competing views we find that rule 19c 3 has not caused any reduction in spreads but may have caused an increase and has had no effect on returns variance

does payment for order flow to your broker help or hurt you the presumption is that a broker executing a stock trade for a retail investor will get the investor the best possible price execution for the transaction in fact the broker often sells the retail investor s trade to an intermediary for cash payment the broker s motivation to generate dealer profits seems to overcome the broker s fiduciary responsibility to obtain the best execution price for the customer raising ethical questions purchasers and internalizers of order flow in the market may cause prices quoted on the nyse to deteriorate making all investors worse off

price clustering in australian water markets the finding of clustering in financial prices on particular digits is common across a broad range of financial markets this article explores whether price clustering is also present in the case of the weekly market for seasonal water in rural victoria australia we find a similar degree of clustering in the seasonal water market this suggests that the trading activities of the market produce characteristics that are similar to more sophisticated and deeper financial markets

price discovery and the effects of fragmentation on market quality evidence from cypriot cross listed stocks using a novel high frequency data set we examine the contribution of greek trading to the price discovery process of a pair of cypriot blue chip cross listed stocks during overlapping trading hours additionally we investigate the effects of market fragmentation on the home market s quality as measured by microstructure based liquidity measures contrary to earlier studies from other markets our findings show that foreign stock exchanges can act as the leading contributors to price discovery and can concentrate the majority of trading activity and produce the lowest transaction costs our results also show that market fragmentation can lead to negative effects on market liquidity

internalization and stock price clustering finnish evidence abstract internalization the practice of brokers executing trades in house is a significant phenomenon in the helsinki stock exchange during the continuous trading session 97 5 upstairs market trades are internalized the corresponding figure for after hours upstairs market trades is 73 1 the prices of internalized trades are somewhat more clustered than the prices of other trades during the continuous trading session but they are not more clustered than the prices of negotiated trades in the after hours upstairs market this suggests that finnish brokers do not use a more discrete set of prices for internalized trades than for other upstairs trades

competition in interregional taxation the case of western coal markets for many products are dominated by small group of states or countries with a natural advantage in the marketplace because of some initial endowment of resources favorable climate or location the purpose of this paper is to explore how such markets involving a few political jurisdictions interact noncooperatively we examine how such a market might be structured and operate and the extent of monopoly rent that can be extracted in the absence of collusion we answer these questions for an empirically estimated model of western u s coal in which two states montana and wyoming dominate production we demonstrate that in this market the amount of rent that can be extracted is greatly reduced through competition relative to a cartel nevertheless even with two producing states competing against each other significant rents can be captured significant enough to refute the contention that little rent can accrue without a cartel

stock splits tick size and sponsorship a traditional explanation for stock splits is that they increase the number of small shareholders who own the stock a possible reason for the increase is that the minimum bid ask spread is wider after a split and brokers have more incentive to promote a stock i document a large number of small buy orders following nasdaq and nyse amex splits during 1993 to 1994 i also find strong evidence that trading costs increase and weak evidence that costs of market making decline following splits this is consistent with splits acting as an incentive to brokers to promote stocks stock splits seem to be purely cosmetic changes with no real economic consequences after a two for one split each shareholder has twice as many shares but each represents a claim on only half as much of the corporation s assets and earnings however one real consequence of a stock split is that the tick size increases as a proportion of the stock s price except for a small number of very low priced issues u s stocks listed on an exchange or on nasdaq have a tick or minimum price variation of 0 125 during the sample period thus a decrease in the stock price and an increase in the relative tick size are indistinguishable consequences of a split some authors notably angel 1997 argue that splits are intended to move relative ticks to desired levels several empirical studies provide indirect evidence that is consistent with an increase in relative tick size as a motivation for splits desai and jain 1997 fama et al 1969 lakonishok and lev 1987 and others document that splits occur after stocks have experienced significant price increases or equivalently after relative tick sizes have decreased significantly angel shows that there is far less dispersion internationally in relative tick sizes than in stock prices

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

revisiting the home bias puzzle downside equity risk deviations from normality in financial return series have led to the development of alternative portfolio selection models one such model is the downside risk model whereby the investor maximizes his return given a downside risk constraint in this paper we empirically observe the international equity allocation for the downside risk investor using nine international markets returns over the last 34 years the results hold for both daily and monthly data and also from an international perspective due to greater downside risk investors may think globally but instead act locally the model s results therefore provide an alternative view of the home bias puzzle

does the specialist matter differential execution costs and intersecurity subsidization on the new york stock exchange this article tests for differences in execution costs among specialist firms for new york stock exchange listed securities execution cost differences provide a measure of the relative performance of specialist firms we find a substantial difference in effective spreads and order processing costs across specialist firms controlling for stock characteristics while economically significant the differences in execution costs between specialist firms are much smaller than the cross market differences reported by huang and stoll 1996 within a specialist firm there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks this article investigates whether differential execution costs exist across new york stock exchange nyse specialist firms and among stocks traded by the same specialist firm execution costs are paid by investors when completing a trade and are separate from the commission costs paid to a broker execution costs arise from the bid ask spread and the price impact of an investor s order on the future bid ask quote stoll 1985 shows that a transactionally efficient financial market which minimizes execution costs also minimizes the deviation in transaction prices from the true price of the underlying security evidence of differential execution costs for similar securities can be used to identify high cost and low cost liquidity providers on the nyse furthermore differential execution costs among stocks traded by the same specialist firm provide evidence consistent with a subsidy from actively traded to inactively traded stocks

do competing specialists and preferencing dealers affect market quality we empirically demonstrate that the opportunities the boston stock exchange and the cincinnati stock exchange offer members to take the other side of their customers orders through affiliated market makers to internalize orders have little short run effect on posted or effective bid ask spreads this is true despite substantial movement of order flow away from the new york stock exchange when trading under one of these regional stock exchange programs begins these results contrast with the adverse effects of market fragmentation and internalization predicted by some theoretical market microstructure analyses and the popular financial press article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

competition among markets the repeal of rule 390 abstract the new york stock exchange repealed its rule 390 on may 8 2000 the rule disallowed exchange members from trading stocks listed prior to april 26 1979 outside of an exchange we examine the implications of the rule s repeal on the competition for order flow as well as on measures of market quality such as spreads depth and price improvement for stocks impacted by the rule we use a second sample of stocks not subject to rule 390 rule 19c 3 stocks to control for market wide trends we have three important findings 1 quoted spreads decrease by about 18 for rule 390 stocks three times more than the reduction for rule 19c 3 stocks 2 effective spreads do not change and 3 the nyse lost little market share even in smaller trades that were supposed to migrate following the repeal our results indicate a paradigm shift in the way the nyse specialists make a market prior to the repeal the specialists set wider quotes but provided extensive price improvement following the repeal the specialists set tighter quotes with lesser price improvement possibilities we believe that this shift is a strategic response by the specialists to retain market share not by improving market quality but by making order flow internalization and payment for order flow less profitable as a result competition improves market quality but not in the way we would generally expect

an analysis of trade size clustering and its relation to stealth trading abstract nyse and nasdaq trades increasingly cluster on multiples of 500 1 000 and 5 000 shares such clustering varies over time and across stocks and tends to increase with the level of trading activity furthermore rounded trades tend to have more persistence both in occurrence and in trade initiation finally medium sized rounded trades tend to have greater relative price impact than large rounded trades from these observations we surmise that trade size clustering is consistent at least in part with the actions of stealth traders who tend to use medium sized rounded transactions in an attempt to disguise their trades

the initiation and withdrawal of odd eighth quotes among nasdaq stocks an empirical analysis christie and schultz 1994 journal of finance 49 1813 1840 nd that market makers in many active nasdaq stocks avoid odd eighth quotes this paper studies 67 58 nasdaq stocks whose market makers initiate withdraw odd eighth quotes these regime shifts are often completed within the span of a day and coincide with dramatic changes in dollar percentage and e ective spreads in most cases we are unable to identify comparable changes in the costs of making markets we do identify long run changes in average prices that may provide a partial explanation however we also nd

quote based competition and trade execution costs in nyse listed stocks abstract this study examines quotations order routing and trade execution costs for seven markets that compete for orders in large capitalization nyse listed stocks the competitiveness of quote updates from each market varies with measures of the profitability of attracting additional order and with volatility and inventory measures the probability of a trade executing on each market increases when the market posts competitive quotes execution costs for non nyse trades when the local market posts competitive non competitive quotes are virtually the same substantially exceed costs for matched nyse trades collectively these results imply a significant degree of quote based competition for order flow and are consistent with off nyse liquidity providers using competitive quotations to signal when they are prepared to give better than normal trade executions

high frequency trading competition we analyze trading dynamics as successive high frequency trading hft firms begin to trade stocks in an equity market entrants compete with incumbents for volume and there is crowding out

experimentation in financial markets in this paper we use a unique data set on the italian interdealer bond market to empirically estimate the process of strategic experimentation the results show how the information generated in the process of interdealer trading affects the incentive to experiment upon receipt of an order dealers deliberately engage in trade with other dealers either to exploit the information contained in the order they receive or if they are uncertain about its quality to assess it by actively experimenting with other dealers we therefore identify hiding and experimenting as main types of dealer strategies

market making with costly monitoring an analysis of the soes controversy we develop a model of price formation in a dealership market where monitoring of the information flow requires costly effort the result is imperfect monitoring which creates profit opportunities for speculators who pick off stale quotes externalities associated with monitoring give rise to multiple equilibria in which dealers earn strictly positive expected profits we obtain various policy implications a switch to automatic execution can improve or worsen spreads and price discovery depending on the specific equilibrium a reduction in the minimum quoted depth tightens the spread but it reduces price efficiency our analysis is relevant for the soes controversy given that speculators in our model behave as the real world soes bandits our model predicts that soes bandits should trade in stocks with small spreads and that soes bandit activity should widen the spread we provide empirical evidence consistent with these predictions

competition and collusion in dealer markets this article develops a game theoretic model to analyze market makers intertemporal pricing strategies we show that dealers who adopt noncooperative pricing strategies may set bid ask spreads above competitive levels this form of implicit collusion differs from explicit collusion where dealers cooperate to fix prices price discreteness or asymmetric information are not required for collusion to occur rather institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers incentives to compete on price public policy efforts to increase interdealer competition should focus on such restrictions

competing with the new york stock exchange research on information economics and securities markets dating back to stigler journal of political economy 69 1961 213 225 journal of business 37 1964 117 142 argues that trading will tend to centralize in major market centers such as the new york stock exchange nyse the nyse s recent mergers with archipelago and euronext bring questions about the viability and effects of competition between stock exchanges to the policy forefront we examine the largely forgotten but unparalleled episode of competition between the nyse and the consolidated stock exchange of new york consolidated from 1885 to 1926 the consolidated averaged 23 of nyse volume for approximately forty years by operating a second market for the most liquid securities that traded on the big board our results suggest that nyse bid ask spreads fell by more than 10 when the consolidated began to trade nyse stocks and subsequently increased when the consolidated ceased operations the empirical analysis suggests that this historical episode of stock market competition improved consumer welfare by an amount equivalent to us 9 6 billion today

on the solution of optimal tax models and other optimization models in economics abstract numerical methods figure prominently in recent optimal tax studies state of the art software packages can readily solve optimal tax models and other optimization models using one such package two recent highly non linear tax models are solved to obtain further results for one model and correct solutions for the second

does order preferencing matter 1we would like to thank david easley eugene kandel the referee g william schwert the editor participants at the dealer markets conference at ohio state university and an anonymous referee for helpful comments we gratefully acknowledge financial support from the johnson graduate school of management and the national science foundation 1 abstract this study examines how order preferencing affects the competitiveness and efficiency of laboratory financial markets we operationalize preferencing by allowing some dealers to execute a portion of the order flow by matching the most favorable quotes available increasing the proportion of order flow that is preferenced can increase bid ask spreads reduce the informational efficiency of prices and benefit dealers at the expense of liquidity traders preferencing has none of these effects however when two or more dealers are not receiving preferencing orders preferencing may significantly degrade market performance if preferencing arrangements affect all or virtually all dealers

execution costs and their intraday variation in futures markets we consider trading costs in the transparent competitive open outcry markets of the chicago mercantile exchange cme in which market makers have no affirmative obligation to trade we document that while cme spreads are similar in magnitude to those in other markets realized spreads are often negative a plausible explanation is that cme market makers are able to employ more complex trading strategies than their equity market counterparts because they are not bound by affirmative obligation the evidence suggests that market transparency and market maker obligations are important determinants of intraday variation in trading costs copyright 2001 by university of chicago press

quotes order flow and price discovery the goal of this article is to examine the impact of 1975 congressional mandate to integrate the trading of nyse listed stocks the conclusions are most of the time the new york stock exchange nyse quote matches or determines the best displayed quote and the nyse is the most frequent initiator of quote changes non nyse markets attract a significant portion of their volume when they are posting inferior bids or offers indicating they obtain order flow for other reasons such as payment for order flow yet when a non nyse market does post a better bid or offer it does attract additional order flow

third market broker dealers cost competitors or cream skimmers 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

can transparent markets survive abstract this paper investigates whether transparent markets can survive when faced with direct competition from less transparent markets we first construct a game theoretic model in which in equilibrium the low transparency dealers capture early order flow and use the resulting informational advantage to quote narrower spreads and earn more profits than their more transparent competitors we then conduct a laboratory experiment that tests and supports all of these predictions a second experiment shows that most dealers choose to be of lower transparency when they are allowed to do so however the informational advantage of low transparency decreases as there are more such dealers while the high transparency dealers get increasing benefit from informed traders who attempt to broadcast deceptive trades as a result a small number of transparent dealers persist in our markets

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

impacts of a common green certificate market on electricity and co2 emission markets in the nordic countries abstract the purpose of this study is to analyze the effects of introducing a common nordic system for tradable green certificates tgcs on the electricity market and a future market for tradable co 2 emission permits teps in the analysis the energy system model generator markal was used to model the electricity and district heating supply systems in the four nordic countries sweden norway finland and denmark it is shown that the introduction of tgc quotas reduces wholesale electricity and tep prices the impact on the latter is very pronounced retail electricity prices may become lower or higher depending on the tgc quota than if obligations to fulfill tgc quotas were absent the tgc scheme s efficiency in reducing a specific amount of co 2 emissions is also compared to the corresponding efficiency of a tep scheme involving a broader range of technologies furthermore obligations to fulfill tgc quotas affect investment incentives for new non renewable electricity supply this seems especially true for gas fired power plants finally it is indicated that electricity supply based on biomass combustion dominates the tgc scheme at least in the short run

soft dollars and the brokerage industry large investors frequently receive some type of research service in retumr for sending an equity trade to a specific brokerage firm the commissions so directed are associated with the term soft dollars a survey of institutional managers and analysis of their trading records reveal something about the effects of soft dollars on the structure of the brokerage industry the use of soft dollars has had significant effects on order flows to diferent types of brokers

preferencing internalization of order flow and tacit collusion evidence from experiments this paper examines preferencing arrangements and tacit collusion in laboratory asset markets in the experiments dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote although some markets were highly competitive several markets reached a collusive equilibrium with wide spreads and near complete intemalization of order flow the paper further examines the role of market transparency and passed order flow on quote setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria

the persistence of dominant firm market share raising rivals cost on the new york stock exchange to explain the persistence of dominant new york stock exchange nyse market share in stock trading of listed securities from 1992 to 2002 we develop a dominant firm price leadership model and hypothesize that nyse specialists raised the costs of rival market makers the model predicts that natural and induced cost advantages will determine the nyse s market share vis a vis the regional exchanges electronic trading systems and nasdaq dealers empirically nyse market share increases with economies of scale and scope abnormal price volatility high asymmetric information and with trading practices that raise rivals costs such as failure to display limit orders that bettered the existing quotes

does the limit order routing decision matter we examine the impact deciding to route limit orders away from the new york stock exchange nyse has on three dimensions of execution quality with methodologies controlling for market conditions and order submission strategies overall differences in limit order execution quality between regional stock exchanges and the nyse are small suggesting that the order routing decision may not affect retail limit order traders substantively conditioning on the distance between the limit order s price and prevailing quotes however reveals systematic differences in execution quality this implies that brokers can strategically route limit orders to improve retail limit order execution quality copyright 2002 oxford university press

cross border listings and price discovery evidence from u s listed canadian stocks we examine the contribution of cross listings to price discovery for a sample of canadian stocks listed on both the toronto stock exchange tse and a u s exchange we nd that priceson the tse and u s exchange are cointegrated and mutually adjusting the u s share of price discovery ranges from 0 2 percent to 98 2 percent with an average of 38 1 percent the u s share is directly related to the u s share of trading and to the ratio of proportions of informative tradeson the u s exchange and the tse and inversely related to the ratio of bid ask spreads with the enhanced globalization of nancial markets the number of non u s rms cross listing shares on a u s exchange has substantially increased attracting non u s listings is now a top priority of the u s stock exchanges at the end of 2000 420 non u s rmswere listed on the new york stock exchange nyse the number of foreign rmslisted on nasdaq waseven higher the popularity of international cross listings has prompted many academic studies on the topic 1 most of these studies focus on the bene ts of international cross listings including the reduced cost of capital and the enhanced liquidity of a rm s stock studiessuch asalexander eun and janakiramanan 1987 1988 and foerster and karolyi 1993 suggest that the cost of capital declines because the portion of the risk premium that compensates for cross border investment barriers dissipates miller 1999 and foerster and karolyi 1999 propose increased investor recognition as another possible explanation several studies examine changes in trading volume and costs due to international cross listing foerster and karolyi 1998 nd that the bid ask spreads in canada decrease after the cross listing of canadian stocks in the united states domowitz glen and madhavan 1998 suggest that the impact of cross listing is complex and depends on the degree of quote transparency that is the extent to which price information is observable in the two markets smith and so anos 1997 examine if cross listing is a zerosum game with increased trading in the united states being oiset by reduced

why nasdaq market makers avoid odd eighth quotes recent studies argue that implicit collusion explains the tendency of nasdaq market makers to avoid odd eighth price quotes this paper focuses on the role that preference trading plays in determining quoted spreads under the postulated effects of preference trading an analysis of the relation between spreads and price fractions explains the paucity of odd eighth quotes on nasdaq empirical results from a comprehensive data set show that exogenous economic characteristics explain the distribution of price fractions across securities and illustrate the stability of that distribution over time these results contradict empirical results offered as support for the collusion hypothesis

stock market quality in the presence of a traded option we use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option we find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated the time series properties of the stock price depend directly on the intrinsic value of the option when the intrinsic value of the option is positive informational efficiency is higher in the market for the stock and volatility is lower we provide evidence that the introduction of an option improves market quality in the underlying asset

do investors prefer round stock prices evidence from israeli ipo auctions abstract we find round number clustering in orders submitted by investors in israeli ipo auctions explanations offered for price clustering such as dealer collusion or implicit agreement to simplify negotiations cannot explain price clustering in this market therefore this is direct evidence that investors prefer round numbers

an empirical study of the effect of rule 19c 3 the extent to which all orders for common stocks should be consolidated that is sent to a single marketplace and the effect of consolidation on competition in the securities markets have been the subject of much debate in the past quarter century this debate has focused on offboard trading restrictions for member firms for example new york stock exchange nyse rule 390 and american stock exchange amex rule 5 and on the institution of appropriate intermarket linkages for example the consolidated transactions tape the consolidated quotations system and the intermarket trading system while the securities and exchange commission sec has attempted to promote competition in the securities markets the results of its efforts are uncertain consequently the consolidation fragmentation debate continues in this article we examine a very specific case in which the sec tried to increase the degree of competition in market making rule 19c 3 allowed off board trading of nyse listed stocks by exchange members as we will show this rule had both beneficial and adverse effects section i describes rule 19c 3 the environment which led to its introduction and the controversy surrounding it in section ii we examine the effect of rule 19c 3 on over the counter otc market making activity we find that for about 34 percent of the eligible stocks the introduction of exchange member market makers increased the total level and also the continuity of otc market making activity in section iii we find that rule 19c 3 has had a statistically significant effect in reducing percentage bidask spreads which ceteris paribus is desirable in section iv our analysis shows that rule 19c 3 has led to an increase in returns variance which ceteris paribus is undesirable finally our summary and conclusion are presented in section v

penny pricing and the components of spread and depth changes abstract recent studies show that decimal pricing led to significant reductions in the spread and depth on the nyse in this paper we examine how the observed changes in the spread and depth can be attributed to different factors we show that stocks with higher proportions of one tick spreads and odd sixteenth quotes and more frequent trading before decimalization experienced larger declines in the spread and depth afterwards we interpret this result as evidence of reduced binding constraints and increased price competition under decimal pricing we also find that decimal pricing led to nontrivial changes in select stock attributes and that these changes exerted an additional impact on spreads and depths our results suggest that sub penny pricing may further reduce the spreads of high volume low risk or low price stocks

the effect of market segmentation and illiquidity on asset prices evidence from exchange listings this article documents the effect on share value of listing on the new york stock exchange and reports the results of a joint test of merton s 1987 investor recognition factor and amihud and mendelson s 1986 liquidity factor as explanations of the change in share value we find that during the 1980s stocks earned abnormal returns of 5 percent in response to the listing announcement and that listing is associated with an increase in the number of shareholders and a reduction in bid ask spreads cross sectional regressions provide support for both investor recognition and liquidity as sources of value from exchange listing the effect on share value of listing on the new york stock exchange nyse by over the counter otc stocks has been the focus of empirical investigation by scholars and practitioners for at least 50 years the consensus conclusion is that an nyse listing is or at least has been associated with a significant increase in share price streetlore has historically attributed this increase in value to the increased investor recognition that is believed to accompany listing on a major exchange until recently this investor recognition explanation has lacked a rigorous analytical foundation merton 1987 fills this void with a model of capital market equilibrium with incomplete information to develop his model merton adopts most of the assumptions of the original sharpe lintner mossin capital asset pricing model capm but relaxes the assumption of equal information across investors he further assumes that investors invest only in the those securities of which they are aware 2 with this modification to the original capm framework merton derives a model in which expected returns increase with systematic risk firm specific risk and relative market value and decrease

tick size bid ask spreads and market structure we propose a link between market structure and the resulting market characteristics tick size bid ask spreads quote clustering and market depth we analyze transactions data of stocks traded on the london stock exchange a dealer market we conclude that market charateristics are endogenous to the market structure the london dealer market does not have a mandated tick size and it exhibits higher spreads higher quote clusterings and higher market depth than the nyse auction market clustering of trade prices is similar in london and new york

effects of market reform on the trading costs and depths of nasdaq stocks the relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate on january 20 1997 the securities and exchange commission began implementing reforms that would permit the public to compete directly with nasdaq dealers by submitting binding limit orders additionally superior quotes placed by nasdaq dealers in private trading venues began to be displayed in the nasdaq market we measure the impact of these new rules on various measures of performance including trading costs and depths our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality

projecting demand and supply of forest biomass for heating in norway abstract this paper assesses the increase in demand and supply for forest biomass for heating in norway in 2020 by then there is a political aim to double the national production of bioenergy from the level in 2008 the competitiveness of woody biomass in central and district heating is analyzed in a model selecting the least cost heating technology and scale in municipalities given a set of constraints and under different fuels price scenarios the supply of forest biomass from roundwood is estimated based on data of forest inventories combined with elasticities regarding price and standing volumes the supply of biomass from harvesting residues is estimated in an engineering approach based on data from the national forest inventories and roundwood harvest the results show how the production of bioenergy is affected by changes in energy prices and support schemes for bioenergy one conclusion from the analyses is that the government target of 14 twh more bioenergy by 2020 is not likely to be met by current technologies and policy incentives the contribution of the analysis is the detailed presentation of the heat market potentials and technology choices combined with supply functions for both roundwood and harvesting residues

market maker quotation behavior and pretrade transparency we examine the impact of differing levels of pretrade transparency on the quotation behavior of nasdaq market makers we find that market makers are more likely to quote on odd ticks and to actively narrow the spread when they can do so anonymously by posting limit orders on electronic communication networks ecns from a public policy perspective our findings suggest that making the level of pretrade transparency on nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further

make take structure and market quality evidence from the u s options markets we examine the make take structure which compensates liquidity suppliers and charges liquidity demanders in the options markets where it competes with a traditional structure that uses payments for order flow using the introduction of the make take structure as an event we find that execution costs including fees for liquidity demanders decline after the event for the affected options that the make take structure encourages market makers to improve quoted prices and that brokers change their routing behavior to include fees in the routing decision the decline in execution costs is consistent with the benefits of the increased quote competition from the make take structure prevailing over the fees the structure charges to liquidity demanders this paper was accepted by wei jiang finance

episodic liquidity crises cooperative and predatory trading we describe how episodic illiquidity arises from a breakdown in cooperation between market participants we first solve a one period trading game in continuous time using an asset pricing equation that accounts for the price impact of trading then in a multi period framework we describe an equilibrium in which traders cooperate most of the time through repeated interaction providing apparent liquidity to one another cooperation breaks down when the stakes are high leading to predatory trading and episodic illiquidity equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity but cause contagion when cooperation breaks down why is illiquidity rare and episodic pastor stambaugh 2003 detect only 14 aggregate low liquidity months over the time period 1962 to 1999 despite being of significant magnitude most of the episodes were short lived and were followed by long periods of liquidity 1 the origin of this empirical observation still remains a puzzle in this paper we attempt to shed light on this puzzle by developing a theoretical model in which a breakdown in cooperation between traders in the market manifests itself in predatory trading this mechanism leads to sudden and short lived illiquidity we develop a dynamic model of trading based on liquidity needs during each period a liquidity event may occur in which a trader is required to liquidate a large block of an asset in a relatively short time period this need for liquidity is observed by a tight oligopoly whose members may choose to predate or cooperate predation involves racing and fading the distressed trader to the market

extreme price clustering in the london equity index futures and options markets price clustering and optimal tick sizes have recently been topics of substantial public policy interest and this paper presents evidence which is relevant to both debates around 98 of quoted and traded prices for liffe stock index derivatives are found to occur at even ticks we report that clustering increases with volatility and transaction frequency and decreases with trade size and find that the proportion of odd ticks is significantly lower near the market open and higher near the close further an inverse relationship is reported between bid ask spreads and the number of odd ticks and spreads cluster at even tick values this evidence of extreme price clustering is the first to be presented for financial derivatives the results support both the price resolution and the negotiation hypotheses of price clustering

location matters an examination of trading profits the electronic trading system xetra of the german security exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight european countries we explore informational asymmetries across the trader population traders located outside germany in non german speaking cities show lower proprietary trading profit their underperformance is not only statistically significant it is also of economically significant magnitude and occurs for the 11 largest german blue chip stocks we also examine whether a trader location in frankfurt as the financial center or local proximity of the trader to the corporate headquarters of the traded stock or affiliation with a large financial institution results in superior trading performance the data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading however we find evidence for an information advantage due to corporate headquarters proximity for high frequency intraday trading

symposium on market microstructure focus on nasdaq abstract this special issue of the journal of financial economics includes six articles that analyze the market microstructure of nasdaq in various ways the question of the costs of trading on nasdaq has become contentious in both the academic and legal regulatory arenas since the christie and schultz 1994 article first noted that many actively traded nasdaq stocks were almost never quoted on odd eights the articles in this symposium bring new and interesting insights to this debate

payments for order flow on nasdaq we present a model of nasdaq that includes the two ways in which marketmakers compete for order f low quotes and direct payments brokers in our model can execute small trades through a computerized system preferencing arrangements with marketmakers or vertical integration into market making the comparative statics in our model differ from those of the traditional model of dealer markets which does not capture important institutional features of nasdaq we also show that the empirical evidence is inconsistent with the traditional model which suggests that preferencing and vertical integration are important components in understanding nasdaq

search in asset markets market structure liquidity and welfare this paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market to this end we generalize the search theoretic model of financial intermediation of darrell duffie et al 2005 to allow for entry of dealers and unrestricted asset holdings

the clustering of ipo gross spreads international evidence patterns of clustering in ipo gross spreads can be identified not only in the u s but also in many other markets across the world the evidence indicates however that these clustering patterns are not necessarily collusive clustering is widespread in many countries with low gross spreads in fact the amount of clustering observed is negatively related to the gross spread level of a country additionally an analysis of abnormal gross spreads following hansen 2001 indicates that few clusters contain abnormal positive surpluses

a comparison of centralized and fragmented markets with costly search how does quotation transparency affect financial market performance biais s irrelevance proposition in 1993 shows that centralized markets yield the same expected bid ask spreads as fragmented markets other things equal however de frutos and manzano demonstrated in 2002 that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets this paper introduces liquidity traders costs of searching for a better quote into the biais model and derives opposite conclusions to these previous studies expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets while market makers prefer fragmented markets

anonymity adverse selection and the sorting of interdealer trades this article asks why london security dealers use more than one trading venue to trade with one another we argue that differences in the exclusivity liquidity anonymity and post trade transparency of each system permit a more efficient sorting of interdealer trades than if there were just one system our evidence comes from detailed data on where london dealers chose to place interdealer trades contrary to intuition we show that uninformed interdealer trades as measured by subsequent price impact tend to migrate to third party brokered systems where trade is anonymous by contrast informed interdealer trades tend to migrate to the direct nonanonymous public market additionally we show that this distribution of trades is supported by differences in the price improvement dealers receive in the direct and brokered markets our findings have implications for three strands of the market microstructure literature first they contribute to our understanding of the importance of anonymity and transparency in securities trading most theoretical models of the effects of anonymity and transparency predict that anonymous trading systems will attract more informed trades

the cost of institutional equity trades presented are an overview of the findings from the recent literature on the cost of u s equity trades for institutional investors and new evidence on trading costs from a large sample of institutional trades the findings discussed have important implications for policymakers and investors implicit trading costs are economically significant equity trading costs vary considerably and vary systematically with trade difficulty and order placement strategy and whether a trade price represents best execution depends on detailed data for the trade s entire order submission process especially information on pretrade decision variables such as the trading horizon

a closing call s impact on market quality at euronext paris abstract the paris bourse currently euronext paris refined its trading system to include electronic call auctions at market closings in 1996 for its less liquid continuous b stocks and in 1998 for its more actively traded continuous a stocks this paper analyzes the effects of the innovation on market quality our empirical analysis of price behavior for two samples of firms 50 b stocks and 50 a stocks for two different calendar dates 1996 and 1998 indicates that introduction of the closing calls has lowered execution costs for individual participants and sharpened price discovery for the broad market we further observe that market quality is improved at market openings albeit to a lesser extent we suggest that a positive spillover effect explains the closing call s more pervasive impact

dealer liquidity in an auction market evidence from the london stock exchange we analyse the trade characteristics and market conditions which determine the market share of a continuous auction trading system at the london stock exchange where a network of broker dealer firms is also available for trade we show that execution and information risks govern the choice of execution venue further we uncover strong commonality in the market share of the order book across stocks and find that variables proxying for market wide liquidity and informational risks also affect the choice of trading venue our results suggest that competing off book liquidity suppliers voluntarily perform at least some of the stabilisation functions normally assigned to designated market makers

the trading profits of soes bandits1 abstract soes bandits are individual investors who use nasdaq s small order execution system soes for day trading their average profit per trade is small but they trade dozens or hundreds of times per week bandits usually establish a position before most market makers have updated their quotes and lay off the position at favorable prices through instinet or selectnet it is noteworthy that they trade profitably with market makers despite having less information bandits keep the profits and bear the losses from their trades thus they have greater incentives to trade well than the employees of market making firms

the shrinking merger arbitrage spread reasons and implications the merger arbitrage spread has declined by more than 400 bps since 2002 this decline which is both economically and statistically significant corresponds to the decline in aggregate returns of merger arbitrage hedge funds as well as increased inflows into merger arbitrage hedge funds part of the decline in the arbitrage spread may be explained by increased trading in the targets stocks following the merger announcement reduced transaction costs and changes in risk related to merger arbitrage these findings suggest that some of the decline is likely to be permanent therefore investors seeking to invest in merger arbitrage hedge funds should focus on returns since 2002

impacts of policy means for increased use of forest based bioenergy in norway a spatial partial equilibrium analysis abstract like the european union eu norway has defined quite ambitious targets regarding increased use of bioenergy however the bioenergy market develops relatively slowly and stronger policies seem necessary to reach the targets this study analyses how different policy means high on the agenda in the norwegian energy debate may affect the use of forest based bioenergy in norway the means studied are i subsidies reducing investment costs of district heating installations ii deposit grant for replacement of oil burners with burners based on bioenergy iii feed in supporting energy production in district heating based on bioenergy the study is based on a regionalised partial equilibrium model covering forestry forest industries and the bioenergy sector the advantage of this methodology is that it allows for assessments of the economic potential of bioenergy under different policy alternatives taking into account the competition for raw materials from the forest industries regional differences regarding heat demand and wood fibre supply as well as important spatial aspects connected to inter regional transport and trade of wood the results of the study give medium term projections for bioenergy use in norway under different bioenergy policy regimes some investments in bioburners in central heating systems and new district heating based on bioenergy are profitable at the current energy prices but policy incentives in terms of grants subsidies or feed in systems make it possible to overcome inertia in investments decisions and provide substantial increase in the supply of bioenergy the results show that the analysed policy means are effective at the current energy price levels and have a significant impact on bioenergy production while some results are specific to norway other results and the methodology used are of more general value also to other european countries

optimum taxation with errors in administration abstract the paper compares the welfare levels which can be achieved by two distinct tax regimes lump sum taxation where one attempts to identify individuals and allocate transfers or subsidies on the basis of characteristics and income taxation where characteristics are not observed but personal incomes are measured and taxed where there are no errors in classifying individuals lump sum taxation is superior but where mistakes are made in the allocation of lump sum grants or subsidies income taxation may be more attractive the level of errors where the regimes are equally desirable in terms of social welfare is computed in simple models following that of feldstein 1973 where there is strong aversion to inequality then income taxation becomes preferable at quite small errors in analysing income taxation it is shown that in the feldstein model with endogenous wages the marginal tax rate in optimum income taxation on the more skilled is negative and that on the less skilled is positive in contrast to the standard results see seade 1977 with exogenous wages