SEC Releases Staff Report
on Order Execution Quality
FOR IMMEDIATE RELEASE
Comparison of Matched Pairs of Nasdaq, NYSE Securities Indicates Nasdaq Spreads Wider Than NYSE for All but Largest Company Securities
Washington, D.C., January 8, 2001 As part of its on-going inquiry into market fragmentation, the Securities and Exchange Commission's Office of Economic Analysis today released a staff report that compares the costs of trading equity securities in the Nasdaq market with trading of listed securities on the New York Stock Exchange. The Report finds that on market orders of 100-499 shares for very large companies the average effective spreads (the actual costs paid by investors) 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 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 supported by the range of other tests.)
For example, on a 300-share market order, the impact of the differences in the large, middle, and small categories would be an increase of between $8.50 and $16.50 a trade. (These amounts are calculated by multiplying the spread difference by the number of shares, and then dividing by two, which reflects that only half of the spread is earned or paid on a single transaction.)
The Report also finds that market order executions are generally faster on Nasdaq than on the NYSE for 100-499 share orders. Average execution times for Nasdaq stocks were faster in each of the four categories – 13.7 seconds less for the very largest stocks, and between 9.8 and 18.7 seconds less for the other three categories. The Nasdaq speed advantage appears to be limited to orders of less than 500 shares. The difference disappears for the 500-1999 share market orders. The 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.
In a speech today at Stanford Law School, Securities and Exchange Commission Chairman Arthur Levitt said, "The study is a careful, independent attempt to apply an established methodology to data not previously available. And I believe the study also provides important indicators of the answer to the question it was designed to address. Its findings strongly suggest that order interaction improves the prices received by customers. For Nasdaq, it confirms a challenge it faces and quantifies what most traders freely acknowledge – the ability to trade inside the best displayed quotes is substantially limited. For the NYSE, it sheds further light on the time it takes for incoming orders to interact with trading interest on the floor – time its customers have long pressed this market to reduce. More broadly it provides context for the question of what immediate executions are worth to investors. One doesn't need a crystal ball to predict some degree of convergence of the two market models, each attempting to develop strengths of the other. Indeed, both have concrete plans to do so. Yet if the study does nothing more than increase pressure on both markets to respond to the longstanding demands of investors, it will have served the public well."
"The Report on the Comparison of Order Executions Across Equity Market Structures" notes that the listed market structure is significantly less fragmented than the Nasdaq market structure for two reasons. First, a significant majority of total trading in listed securities occurs on a primary exchange. Second, the primary exchanges are predominantly agency markets in which investors' orders interact directly. In contrast, no single market center accounts for a majority of Nasdaq trading, and most of the trading is done with dealers with relatively little interaction between customer orders.
Additional Materials Available on This Topic
The Report on the Comparison of Order Executions Across Equity Market Structures
Speech by Chairman Levitt: "The National Market System: A Vision That Endures"