Electronic Communications Networks and Market Quality

We compare the execution quality of trades with market makers to trades executed on Electronic Communications Networks (ECNs). Average quoted, realized, and effective spreads are smaller for ECN trades than for market-maker trades even though ECN trades are more informative than trades with market makers. Increased trading on ECNs also improves most measures of overall market quality. In the cross section, more ECN trading is associated with lower quoted, effective, and realized spreads, both overall and on trades with market makers. More ECN trading is also associated with less quoted depth.

[1]  Prajit K. Dutta,et al.  Competition and Collusion in Dealer Markets , 1997 .

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

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

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

[5]  Bhagwan Chowdhry,et al.  Multimarket Trading and Market Liquidity , 1991 .

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

[7]  Donald B. Keim,et al.  The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects , 1996 .

[8]  J. Hausman.  Specification tests in econometrics , 1978 .

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

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

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

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

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

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

[15]  Lawrence Harris,et al.  Optimal Dynamic Order Submission Strategies In Some Stylized Trading Problems , 1998 .

[16]  Robert H. Battalio.  Third Market Broker-Dealers: Cost Competitors or Cream Skimmers? , 1997 .

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

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