David C. Porter

Tick Size and Market Quality

All of the US stock markets have reduced their respective minimum tick sizes. Since the three major US markets, the American Stock Exchange (AMEX), New York Stock Exchange (NYSE), and Nasdaq, all have different order-priority systems, the impact of the tick-size reduction on spread width, as well as other aspects of market quality, can differ across the markets. Given that previous research has established a link between spread width and a firms cost of capital, this differing impact is important to firms in their exchange listing decision. This study examines changes in market quality across two different priority systems, price-time and price-sharing, following a reduction in the minimum tick size by the Toronto Stock Exchange (TSE) on April 15, 1996. We find that, following the reduction in minimum tick size on the TSE, spreads generally narrow and quoted depths decline for both priority systems. (Depth is defined as the total number of shares offered or sought at a price.) The effect is greatest on low-priced, high-volume stocks.

Post-trade transparency on Nasdaq's national market system

Abstract This article examines late trade reporting on the Nasdaq National Market System. A substantial number of trades are reported out-of-sequence on both absolute levels and relative to the combined centralized exchanges. We find minimal support for NASD permitted reasons for the late trade reporting. Evidence suggests that market makers could use late trade reporting to manage the release of information. This evidence is consistent with the hypothesis that the delayed reporting of trades is neither a random occurrence nor fully explainable by factors outside the market makers control.

Fragmentation, Competition, and Limit Orders: New Evidence from Interday Spreads

Daily spreads for NYSE stocks (which also trade off board) with average spreads likely set by the specialist, are found to exhibit spread behavior consistent with the fragmentation hypothesis - volume increases off board widen NYSE spreads. Stocks with average spreads likely dominated by limit orders exhibit a competition effect in 1987, but a fragmentation effect in 1988 and 1989 - volume increases off board decrease NYSE volume, also widening NYSE spreads. As in previous research, increases in total volume are found to decrease NYSE spreads. These findings lead to the conclusion that multiple markets may be a less effective form of competition than limit orders and that a national system of limit orders (as originally proposed in the National Market System) may further narrow spreads where the specialists spread is not currently dominated by limit orders.

Dispersed Trading and the Prevention of Market Failure: The Case of the Copenhagen Stock Exchange

With augmented demands on power grids resulting in longer and larger blackouts combined with heightened concerns of terrorist attacks, trading institutions and policy makers have widened their search for systems that avoid market failure during these disturbing events. We provide insight into this issue by examining trading behaviour at the Copenhagen Stock Exchange during a major blackout. We find that although market quality declined, markets remained functional and some price discovery occurred during the blackout period suggesting that the NOREX structure of interlinked trading systems combined with widely dispersed trading locations may be a viable means of protection against market failure during massive power disruptions or terrorist attacks.