Competitive Stock Markets: Evidence from Companies’ Dual Listings on the NYSE and NASDAQ

In 2004, NASDAQ launched its dual listing program, which allows NYSE-listed companies to list concurrently on NASDAQ. Investigating this innovation and the impact of competitive interaction between the two markets on both order flow and market liquidity, this study found that dual listing is associated with a significant net growth in aggregate trading volume. Moreover, dual listing narrows the bid–ask spreads on both markets. Overall, dual listing appears to lower transaction costs and improve liquidity for traders on both markets. The tug-of-war between the NYSE and NASDAQ for stock-exchange listings has increased significantly in recent years. In 2004, NASDAQ launched its dual listing program, which allows NYSE-listed companies to list concurrently on NASDAQ. We studied the competitive response of financial markets to the cross-listing of stocks. Listing on NASDAQ by companies that are also listed on the NYSE increases the degree of competition among buyers and sellers of their shares, as well as among market makers and dealers in those markets. Conventional economic theories predict that increased competition will lead to lower trading costs for both stocks and market-making services. When a stock is traded on multiple markets, however, theories on market fragmentation warn that transaction costs could increase. Dual listing provides a unique opportunity to examine the impact of competition versus fragmentation on price discovery and trading liquidity because the same shares are traded on both domestic market centers. A related question is how different market structures influence the competitive response because the NYSE and NASDAQ use disparate trading structures and mechanisms. Current evidence suggests that the NYSE tends to offer lower trading costs, on average, but NASDAQ guarantees greater anonymity of executions. Dual listing enhances opportunities for traders to self-sort into “face time” versus automated trading systems that are based on their unique needs and strategies. It represents a distinctive event that allows us to examine the competitive response from two different market structures. We studied the stocks of eight NYSE companies that participated in the dual listing program by also listing on NASDAQ over our sample period of 2004−2007. Because dual listing allows companies to trade their stocks away from the NYSE, it intensifies the degree of competition for order flow between the two markets but accentuates the fragmentation of order flow. We found that the average daily trading volume and the number of trades increase significantly after dual listing for both markets, which indicates net growth in trading activity in the dual-listed stocks. The NYSE attracts more orders, and NASDAQ accounts for a higher proportion of block trades. Further, average bid–ask spreads decrease after dual listing on both markets, with the spreads on the NYSE narrower than those on NASDAQ. NASDAQ, however, offers greater price improvement relative to its quotes through a higher proportion of trades occurring within and also has lower informed trading costs. Overall, our study shows that dual listing provides a net benefit for all traders on both markets through lower trading costs and improved liquidity.