Can the Treatment of Limit Orders Reconcilethe Differences in Trading Costs between theDifferences in Trading Costs between NYSE and NasdaqIssues?

Abstract

In this paper, we determine whether each bid (ask)quote reflects the trading interest of thespecialist, limit order traders, or both for asample of NYSE stocks in 1991. We then compareNasdaq spreads with NYSE spreads that reflect thetrading interest of the specialist. Our empiricalresults show that the average Nasdaq spread issignificantly larger than the average NYSEspecialist spread. We find that, on average, 49% ofthe difference between Nasdaq and specialist spreadsis due to the differential use of even-eighth quotesbetween Nasdaq dealers and NYSE specialists. We alsofind that the NYSE specialist spread issignificantly larger than the limit order spread,although NYSE specialists and limit order tradersare similiar in their use of even-eighth quotes.