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Intraday Variation in the Bid‐Ask Spread: Evidence after the Market Reform
Author(s) -
Chung Kee H.,
Zhao Xin
Publication year - 2003
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.00054
Subject(s) - bid–ask spread , variation (astronomy) , order (exchange) , business , financial economics , limit (mathematics) , bid price , market maker , econometrics , economics , finance , stock market , market liquidity , geography , mathematics , mathematical analysis , physics , astrophysics , context (archaeology) , archaeology
In this article we show that intraday variation in spreads for Nasdaq‐listed stocks has converged to intraday variation in spreads for NYSE‐listed stocks after the implementation of the new order‐handling rules. We attribute this convergence to the Limit Order Display Rule, which requires that limit orders be displayed in Nasdaq best bid and offer when they are better than quotes posted by market makers. Our findings suggest that the different patterns of intraday spreads between NYSE and Nasdaq stocks reported in prior studies can largely be attributed to the different treatment of limit orders between the NYSE and Nasdaq before the market reform.