We employ the Reuters database to compare execution costs for 2,330 matched-pair securities across the top 7 equity markets in the Dow Jones STOXX Global 1800 Index. This sample encompasses a wide variety of thirteen market design features. In addition, we investigate execution costs well beyond the most heavily traded stocks to include equities in the sixth through tenth deciles of traded value. Our findings indicate that full transparency of the limit order book to investors and a composite of unique NYSE features (but not the presence of the crowd) unequivocally reduce effective spreads. In contrast, a fully transparent limit order book revealed to brokers, the presence of a market maker, or the mixture of execution systems present on the LSE sharply increase effective spreads in both thickly and thinly-traded stocks. The effect of a physical trading floor is statistically significant but relatively small; it increases effective spreads slightly for thickly-traded firms, and reduces them for thinly-traded stocks. The findings for price impact are the same with three exceptions. First, the presence of a trading floor increases costs, dramatically so for thinlytraded stocks. Second, a fully transparent limit order book for brokers raises price impact for thickly traded stocks, but lowers price impacts for thinly traded firms. Third, in thinly-traded stocks, London???s hybrid market decreases price impact, and in thickly-traded stocks, crowd trading on the NYSE and full transparency to investors decrease price impact. Finally, the results for realised spread are essentially the same as those for effective spread, with the exception that the effect of the presence of a trading floor is to reduce realised spreads. Overall, the London Stock Exchange is the highest execution cost market, and the NYSE is the lowest. This research includes a market-specific study of the effect on execution cost of the Liquidity Provider of Euronext Paris. Euronext Paris affords a natural experimental research design because a third of firms have Liquidity Providers and two thirds do not. Results indicate quoted spreads, effective spreads and realized spreads are significantly affected by the presence of a Liquidity Provider, but price impacts are not. On the one hand, this suggests that the thickly-traded stocks where the Liquidity Providers are prohibited have sufficient liquidity in their absence. On the other hand however, liquidity providers on Euronext Paris reduce effective and realised spreads in essentially all stocks. This finding suggests that the limit order book refreshes much more quickly after developing an imbalance of large size orders when Liquidity Providers can facilitate other liquidity suppliers in assessing picking off risk. The Liquidity Provider increases quoted spreads for thickly-traded firms from the first three traded value deciles while reducing quoted spreads for the lower deciles.
| Identifer | oai:union.ndltd.org:ADTP/242690 |
| Date | January 2007 |
| Creators | Cook, Rowan M, Banking & Finance, Australian School of Business, UNSW |
| Publisher | Awarded by:University of New South Wales. School of Banking and Finance |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | Copyright Rowan M Cook, http://unsworks.unsw.edu.au/copyright |
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