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Specialists, Limit‐Order Traders, and the Components of the Bid‐Ask Spread
Author(s) -
Chung Kee H.,
Van Ness Bonnie F.,
Van Ness Robert A.
Publication year - 2004
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.0732-8516.2004.00075.x
Subject(s) - adverse selection , limit (mathematics) , stock exchange , bid–ask spread , sample (material) , stock (firearms) , ask price , order (exchange) , econometrics , economics , bid price , market maker , financial economics , business , actuarial science , mathematics , finance , geography , stock market , physics , thermodynamics , mathematical analysis , archaeology , context (archaeology)
This study compares the components of the bid‐ask spread estimated from quotes that reflect the trading interest of specialists with those estimated from limit‐order quotes and all available quotes for a sample of New York Stock Exchange (NYSE) stocks. The results show that the adverse selection component of the spread estimated from specialist quotes is significantly smaller than the corresponding figures from limit‐order quotes and entire quotes. We interpret this as evidence that NYSE specialists transfer at least a part of adverse selection costs to outsiders through the discretionary use of limit orders. Our results show that the estimation/interpretation of the components of the spread using quote data that include both specialist and limit‐order interests is problematic.