Determinants of Adverse Selection on the NYSE and NASDAQ: A Paired Comparison
37 Pages Posted: 21 Jun 2001
Date Written: June 2001
Abstract
Using a matched sample of NYSE and Nasdaq stocks we examine the determinants of differences in the adverse selection component of the spread. Consistent with previous work, we find that adverse selection is less for Nasdaq stocks than for NYSE stocks. Further, we find that many of the factors that we hypothesize to be correlated with adverse selection are significant determinants for only NYSE stocks. Our findings are consistent with the interpretation that the more fragmented nature of the Nasdaq market means that adverse selection is less important to Nasdaq market makers than it is to the NYSE specialist. Consistent with this hypothesis, we find adverse selection is negatively correlated with the number of market makers for Nasdaq stocks. Our results suggest researchers should use caution when using adverse selection components as a proxy for information opacity without also controlling for the listing exchange.
Keywords: Components of the spread, NYSE, Nasdaq, adverse selection, fragmentation
JEL Classification: G14, G18
Suggested Citation: Suggested Citation
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