FOR IMMEDIATE RELEASE 2001-6 SEC Releases Staff Report on Order Execution Quality Comparison of Matched Pairs of Nasdaq and NYSE Securities Indicates Spreads on Nasdaq Are Wider Than NYSE For All But Largest Company Securities Washington DC, 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. Selected Findings While 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 spreads for small market orders and on speed of execution for market orders. Effective Spreads for 100-499 Share Market Orders Issuer Size Category Very Large Middle Small Large 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* *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively Price Improvement 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. National Best Bid and Offer (NBBO) Quoted Spreads Issuer Size Category Very Large Middle Small Large 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 Market Order Execution Times in Seconds -- 58 Closest Matched Pairs Issuer Size Category Very Large Middle Small Large 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 Selected Notes on Methodology The results are separately calculated for four categories of Nasdaq stocks: 1. Very Large: A group of the very largest Nasdaq stocks in terms of trading volume and market capitalization, as specifically selected by Nasdaq. (Nasdaq's selections supplemented an initial random sample of stocks in this category.) 2. Large: A random sample of Nasdaq stocks with market capitalization over $1 billion 3. Middle: A random sample of Nasdaq stocks with market capitalization between $200 million and $1 billion 4. Small: A random sample of Nasdaq stocks with market capitalization less than $200 million * The data in the report include customer orders for the week of June 5-9, 2000 taken from the Order Audit Trail System (OATS). These orders are for a total of 221 Nasdaq stocks, 25 of which were specifically selected by Nasdaq as being their top stocks in terms of trading volume and market capitalization. SEC staff selected the remaining 196 Nasdaq stocks by taking a random sample of Nasdaq stocks stratified by dollar trading volume. The Report includes data from the System Order Data (SOD) file for all 1141 NYSE stocks that pass the same initial filters used to construct the Nasdaq sample. * The Report includes a "matched pair" analysis that compares order executions in Nasdaq-listed stocks to NYSE order executions in NYSE-listed stocks, where the stocks in each pair have similar market capitalization, share price, return volatility and trading volume. This analysis is complemented and confirmed by eleven other tests that use larger samples and use regression techniques to control for differences in these and other features. * The Report uses customer order data, which has only recently come available for Nasdaq securities. This enables accurate calculation of effective and realized spreads and order execution speeds, and also allows separate analysis of different types of orders. For the most part, the Report uses measures that will soon be available directly from market centers under rule 11Ac1-5 -- the Commission's recently adopted Execution Quality Disclosure Rule. Note: While every attempt has been made to design the tests and present the results in a clear and unbiased manner, such a comparative analysis is necessarily complex and there are several important caveats that should be carefully considered by anyone reviewing this report. The caveats are detailed in the Executive Summary. # # #