Who Gets Price Improvement on the NYSE

Abstract

Market orders sent to the NYSE may be executed at prices better than the specialists' quotes. This study investigates the conditions under which this price improvement occurs and whether it is available to everyone or only certain groups. Over 25% of NYSE SuperDot market orders in this study were filled at prices better than the quote, for an average price improvement of approximately $.04 per share. The rate of price improvement increases from about 10 percent with a one-tick spread to around 50 percent with a spread of two ticks or more. "Marketable limit" orders (limit orders with limit prices that could be filled immediately at the current quotes) receivesubstantially less price improvement than market orders, a result not explained by order size. Unlike on the London Stock Exchange, orders placed by individuals get approximately the same or better price improvement than orders placed by brokerage firms or institutions, although index arbitrageurs get less. If hidden SuperDot limit orders were exposed, the rate of price improvement would have decreased about 15 percent.

JEL Classification: G10, G11, G18