Fragmentation, Competition, and Limit Orders: New Evidence from Interday Spreads
Quarterly Review of Economics and Finance, Vol. 38 No. 1, Spring 1998
Posted: 18 Apr 1998
Abstract
Daily spreads for NYSE stocks (which also trade off board) with average spreads likely set by the specialist, are found to exhibit spread behavior consistent with the fragmentation hypothesis - volume increases off board widen NYSE spreads. Stocks with average spreads likely dominated by limit orders exhibit a competition effect in 1987, but a fragmentation effect in 1988 and 1989 - volume increases off board decrease NYSE volume, also widening NYSE spreads. As in previous research, increases in total volume are found to decrease NYSE spreads. These findings lead to the conclusion that multiple markets may be a less effective form of competition than limit orders and that a national system of limit orders (as originally proposed in the National Market System) may further narrow spreads where the specialist's spread is not currently dominated by limit orders.
JEL Classification: G19, G14
Suggested Citation: Suggested Citation