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Office of Economic Analysis:
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Issuer Size Category |
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Very Large |
Large | Middle | Small | |
Number of Pairs (58 total) | 5 | 14 | 26 | 13 |
Market Capitalizations (millions) | ||||
Nasdaq stocks | 50,115 | 3,330 | 447 | 144 |
NYSE stocks | 45,349 | 3,434 | 501 | 169 |
The Report includes a variety of measures of order executions, including effective spread, realized spread, quoted spread, speed of execution, and rate of execution. This summary focuses on effective and realized spread for small market orders, and on speed of execution for market orders.
The effective spread measures the execution cost paid by investors by comparing the execution price to the midpoint of the NBBO quoted spread at the time that the order arrived at the market center for execution. These cost differences are doubled in order to make the effective spread statistics comparable to quoted spreads. For example, if a buy order arrives when the spread midpoint is $20 per share and the buyer pays $20.125 per share, the effective spread is (20.125 - 20) times 2, which equals $.25 per share.
The Report finds that, for market orders of 100-499 shares in the very large category of matched Nasdaq and NYSE stocks, the average effective spreads are nearly equal. (Although the first matched-pairs test for this category shows Nasdaq effective spreads lower than NYSE effective spreads by 1.2 cents per share, this estimate is statistically insignificant and the results are mixed across the range of the tests.) For 100-499 share market orders in the large, middle and small categories, the first matched-pairs test shows that the average Nasdaq effective spreads are from 5.7 to 11 cents per share wider than those for the matched NYSE stocks. (These differences are statistically significant and consistent across the range of tests).
The higher effective spreads for 100-499 share Nasdaq market orders, for all but the very large stocks, arguably might be explained by more difficult order flow. In other words, the dealers or other traders who are supplying liquidity on Nasdaq might be forced to charge wider effective spreads to protect themselves against a high proportion of informed trades included in the market orders. To test this possibility, we also examine realized spreads. The realized spread is similar to the effective spread, except that it uses the midpoint of the NBBO quoted spread five minutes after the order was executed. As its name implies, the realized spread is a very short-term proxy for the potential profit realized by the dealer or other trader taking the other side of the order. For market orders of 100-499 shares, the Report finds that average realized spreads are nearly equal for the very large matched Nasdaq and NYSE stocks. In the large, middle and small categories, the average Nasdaq realized spreads for 100-499 share market orders are 6.8 to 14.6 cents per share wider than those for the matched NYSE stocks. These results suggest that the higher effective spreads on Nasdaq are not a result of more difficult order flow.
The following table summarizes the results discussed above for 100-499 share market orders, using the first test based on the 58 closest matches. Tables 6 and 9 in the Report show that the other eleven tests produce substantially similar results.
Issuer Size Category | |||||||||
Very Large | Large | Middle | Small | ||||||
Dollar Effective Spreads | |||||||||
Average Across Nasdaq Stocks | 0.071 | 0.150 | 0.206 | 0.164 | |||||
Average Across NYSE Stocks | 0.083 | 0.093 | 0.097 | 0.088 | |||||
Difference | -0.012 | 0.057 | ** | 0.110 | *** | 0.076 | * | ||
Dollar Realized Spreads | |||||||||
Average Across Nasdaq Stocks | 0.025 | 0.081 | 0.177 | 0.155 | |||||
Average Across NYSE Stocks | 0.025 | 0.013 | 0.028 | 0.048 | |||||
Difference | 0 | 0.068 | ** | 0.149 | *** | 0.107 | *** |
*,**, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively
To provide a comparison with the effective spreads paid by investors, the Report also examines quoted spreads. In the very large category, the Report finds that quoted spreads on Nasdaq stocks are on average 5.4 cents per share narrower than quoted spreads for the matched NYSE stocks. Comparing quoted spreads to effective spreads suggests that in Nasdaq stocks many orders are executed at the quotes, whereas many orders sent to the NYSE are executed at better prices inside the quotes. The NYSE rules require that the orders be given the opportunity to interact with other orders, which can result in price improvement. In the large and small categories, quoted spreads are nearly equal across the two markets, whereas the average Nasdaq quoted spreads are somewhat wider in the middle category. As is the case for the very large stocks, the Nasdaq quoted spreads for the other three categories are roughly equal to the effective spreads, whereas the effective spreads for small market orders sent to the NYSE reflect substantial price improvement.
Issuer Size Category |
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Very Large | Large | Middle | Small | ||||||
Average Across Nasdaq Stocks | 0.079 | 0.149 | 0.211 | 0.154 | |||||
Average Across NYSE Stocks | 0.133 | 0.148 | 0.157 | 0.138 | |||||
Difference | -0.054 | ** | 0.001 | 0.053 | ** | 0.016 |
* and ** denote statistical significance at the 10% and 5% levels, respectively
The Report finds that market order executions are generally faster on Nasdaq than on the NYSE for 100-499 share orders. The difference disappears for the 500-1999 share market orders. Our results indicate that the NYSE executions tend to be somewhat faster than the Nasdaq executions for 2000-4999 share market orders, but Nasdaq believes that many large "not held" orders are not properly identified in their system. This miscoding may reduce the accuracy of the comparison between the two markets for the largest category of orders. The following Table shows the results for the first matched-pairs test. As shown on Tables 19-21 of the Report, the other tests yield similar results.
Issuer Size Category |
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Very Large | Large | Middle | Small | ||||||
100-499 Share Market Orders | |||||||||
Average Across Nasdaq Stocks | 3.4 | 6.0 | 7.8 | 4.5 | |||||
Average Across NYSE Stocks | 17.1 | 15.8 | 26.5 | 15.8 | |||||
Difference | -13.7 | *** | -9.8 | *** | -18.7 | *** | -11.3 | *** | |
500-1999 Share Market Orders | |||||||||
Average Across Nasdaq Stocks | 17.3 | 24.0 | 25.0 | 16.8 | |||||
Average Across NYSE Stocks | 20.6 | 17.4 | 27.9 | 20.6 | |||||
Difference | -3.3 | 6.6 | ** | -2.9 | -3.8 | ||||
2000-4999 Share Market Orders | |||||||||
Average Across Nasdaq Stocks | 53.2 | 73.3 | 91.4 | 72.9 | |||||
Average Across NYSE Stocks | 24.3 | 28.1 | 50.2 | 25.6 | |||||
Difference | 29.0 | * | 45.2 | *** | 41.2 | 47.3 | ** |
*,**, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively
View the report (available in PDF format).
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