Dimensions of execution quality: Recent evidence for US equity markets

I analyze market order execution quality using order-based data reported in accordance with SEC Rule 11Ac1-5. These data facilitate a comprehensive investigation of multiple dimensions of execution quality, including measures of costs and speed, for large samples of common stocks on Nasdaq and the NYSE. The evidence is consistent with competitive equity markets. Overall execution costs on Nasdaq exceed those on the NYSE, but orders execute faster. This relationship reverses for larger orders exceeding 1,999 shares. The apparent trade-off between costs and speed suggests that inferring execution quality from costs alone may be problematical. It also illustrates the need for models of trader behavior that can accommodate multiple dimensions of execution quality.

[1]  Hendrik Bessembinder,et al.  Issues in Assessing Trade Execution Costs , 2000 .

[2]  Michael J. Barclay.  Bid-ask spreads and the avoidance of odd-eighth quotes on Nasdaq: An examination of exchange listings , 1997 .

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

[4]  M. Lipson.  Competition Among Market Centers , 2003 .

[5]  Louis K.C. Chan,et al.  The Behavior of Stock Prices Around Institutional Trades , 1993 .

[6]  H. Stoll,et al.  Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE , 1996 .

[7]  Herbert M. Kaufman,et al.  A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks , 1997, Journal of Financial and Quantitative Analysis.

[8]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[9]  Hans G. Heidle,et al.  Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings , 2001 .

[10]  Maureen O'Hara,et al.  Building blocks: An introduction to block trading☆ , 1987 .

[11]  Jeffrey M. Bacidore,et al.  Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange , 2003 .

[12]  James P. Weston,et al.  Competition on the Nasdaq and the Impact of Recent Market Reforms , 2000 .

[13]  Hendrik Bessembinder.  Trade Execution Costs on Nasdaq and the NYSE: A Post-Reform Comparison , 1998 .

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

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

[16]  H. Stoll.  THE SUPPLY OF DEALER SERVICES IN SECURITIES MARKETS , 1978 .

[17]  R. Engle,et al.  Time and the Price Impact of a Trade , 1999 .

[18]  Robert H. Battalio,et al.  All else equal?: a multidimensional analysis of retail, market order execution quality , 2003 .

[19]  Jerold B. Warner,et al.  Stealth trading and volatility , 1993 .

[20]  Donald B. Keim,et al.  Transactions costs and investment style: an inter-exchange analysis of institutional equity trades , 1997 .

[21]  R. Jennings,et al.  Public Disclosure and Private Decisions: The Case of Equity Market Execution Quality , 2003 .

[22]  Duane J. Seppi.  Equilibrium Block Trading and Asymmetric Information , 1990 .

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

[24]  Terrence Hendershott,et al.  Competition among Trading Venues: Information and Trading on Electronic Communications Networks , 2003 .

[25]  Hans R. Stoll,et al.  Presidential Address: Friction , 2000 .

[26]  Evan L. Porteus,et al.  Temporal Resolution of Uncertainty and Dynamic Choice Theory , 1978 .

[27]  Selection Biases and Cross-Market Trading Cost Comparisons* , 2003 .

[28]  Charles M. C. Lee.  Market Integration and Price Execution for NYSE-Listed Securities , 1993 .

[29]  S. Ross.  Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy , 1989 .

[30]  T. Hendershott,et al.  Island Goes Dark: Transparency, Fragmentation, and Regulation , 2005 .

[31]  Maureen O'Hara,et al.  Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow , 1996 .

[32]  H. Demsetz,et al.  The Cost of Transacting , 1968 .

[33]  Maureen O'Hara,et al.  PRICE, TRADE SIZE, AND INFORMATION IN SECURITIES MARKETS* , 1987 .

[34]  Order Submission Strategy and the Curious Case of Marketable Limit Orders , 2002, Journal of Financial and Quantitative Analysis.

[35]  Lawrence Harris,et al.  Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy , 1996, Journal of Financial and Quantitative Analysis.

[36]  R. Huang,et al.  Market Structures and Liquidity: A Transactions Data Study of Exchange Listings , 1994 .

[37]  Hendrik Bessembinder,et al.  Trade Execution Costs and Market Quality after Decimalization , 2003, Journal of Financial and Quantitative Analysis.

[38]  Marshall E. Blume.  The Structure of the Us Equity Markets , 2000 .