NYSE Execution Costs

This paper uses unique audit trail data to evaluate execution costs and price impact for all NYSE order types: system orders as well as all types of floor orders. Almost 50 percent of market order volume and floor broker volume in the sample receives price improvement. Prices move significantly in the direction of the trade before the execution of ITS orders, marketable limit orders, and floor broker orders. Realized half-spreads are significantly positive for market orders and ITS orders, but they are significantly negative for all floor-order types. Floor broker orders are the most informative order type, followed by ITS orders, and marketable limit orders. By contrast, prices move in the opposite direction to the trade following regular limit orders, specialist orders, and percentage orders. Despite this, limit orders, specialist orders, and percentage orders are the only order types to outperform the volume-weighted average price (VWAP). The reason is that these order-types on average gain the spread (negative effective half-spreads) rather than paying it. Although floor broker orders are most informative, they under-perform the VWAP. The most likely reason is that floor orders are associated with substantial leakage, presumably because of order splitting. Taken together, our results emphasize how important the composition of order flow is for measures of execution costs and market quality. First Draft: September 27, 2000 This Draft: July 31, 2001 Preliminary and Incomplete Please do not quote without the author’s prior approval. Comments welcome. * Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH 43210, 614292-6460, [email protected]. I thank the NYSE for giving me the opportunity to gain insight into the nature of floor trading during my time as Visiting Research Economist at the NYSE, and for giving me access to the data necessary for this project. I especially thank George Sofianos for his encouragement to pursue this project. I am also grateful for financial support from the Dice Center for Financial Research. The comments and opinions expressed in this paper are the author’s and do not necessarily reflect those of the directors, members or officers of the New York Stock Exchange, Inc.