Determinants of Adverse Selection on the NYSE and NASDAQ: A Paired Comparison

37 Pages Posted: 21 Jun 2001

See all articles by Robert A. Van Ness

Robert A. Van Ness

University of Mississippi - Department of Finance

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Richard S. Warr

North Carolina State University

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

Van Ness, Robert A. and Van Ness, Bonnie F. and Warr, Richard S., Determinants of Adverse Selection on the NYSE and NASDAQ: A Paired Comparison (June 2001). Available at SSRN: https://ssrn.com/abstract=274369 or http://dx.doi.org/10.2139/ssrn.274369

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Richard S. Warr

North Carolina State University ( email )

BOX 7229
Raleigh, NC 27695-7229
United States
919-513-4646 (Phone)
919-515-6943 (Fax)

HOME PAGE: http://www4.ncsu.edu/~rswarr/

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