Information and Trading on Electronic Communications Networks

The differences between ECNs and Nasdaq market makers are used to formulate and test several hypotheses about the choice of trading venue and the importance of ECN trades in the price discovery process. Trades are more likely to occur on ECNs when spreads are narrow and when trading volume and stock-return volatility are high. Medium and large trades on ECNs have lower effective spreads than comparable market-maker trades, although this is not the case for small trades unless they occur on noninteger ticks. ECN trades have greater permanent price impacts than market-maker trades implying that informed trades are more likely to occur on ECNs. Overall, more private information is revealed through ECN trades than through market-maker trades even though more trades occur with market makers.

[1]  Herbert M. Kaufman,et al.  A Cross-Exchange Comparison of Execution Costs and Information Flow for Nyse-Listed Stocks , 1997 .

[2]  Joel Hasbrouck,et al.  One Security, Many Markets: Determining the Contributions to Price Discovery , 1995 .

[3]  David Easley,et al.  Liquidity, Information, and Infrequently Traded Stocks , 1996 .

[4]  Haim Mendelson,et al.  Crossing Networks and Dealer Markets: Competition and Performance , 2000 .

[5]  Burton Hollifield,et al.  Empirical Analysis of Limit Order Markets , 2001 .

[6]  Yusif Simaan,et al.  The Quotation Behavior of Ecns and NASDAQ Market Makers , 1998 .

[7]  W. Greene.  Sample Selection Bias as a Specification Error: Comment , 1981 .

[8]  Jeffrey H. Harris,et al.  Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks , 1999 .

[9]  Joel Hasbrouck.  The Summary Informativeness of Stock Trades: An Econometric Analysis , 1991 .

[10]  Jonathan R. Macey,et al.  The Law and Economics of Best Execution , 1997 .

[11]  L. Glosten.  Is the Electronic Open Limit Order Book Inevitable , 1994 .

[12]  Haim Mendelson,et al.  Consolidation, Fragmentation, and Market Performance , 1987, Journal of Financial and Quantitative Analysis.

[13]  Charles M. C. Lee,et al.  Inferring Trade Direction from Intraday Data , 1991 .

[14]  Ian Domowitz,et al.  Auctions as algorithms : Computerized trade execution and price discovery , 1994 .

[15]  H. Mendelson.  MARKET BEHAVIOR IN A CLEARING HOUSE , 1982 .

[16]  J. Heckman.  Sample selection bias as a specification error , 1979 .

[17]  Joel Hasbrouck,et al.  Measuring the Information Content of Stock Trades , 1991 .

[18]  R. Huang,et al.  The Quality of ECN and Nasdaq Market Maker Quotes , 2002 .

[19]  Christine A. Parlour,et al.  Liquidity-Based Competition for Order Flow , 2003 .

[20]  Ananth N. Madhavan,et al.  Consolidation, Fragmentation, and the Disclosure of Trading Information , 1995 .