A Cross-Exchange Comparison of Execution Costs and Information Flow for Nyse-Listed Stocks

We examine execution costs for trades in NYSE issues completed at the NYSE, the NASD stock market, and the regional stock exchanges during 1994. We find that while effective bid-ask spreads are only slightly smaller at the NYSE, realized bid-ask spreads, which measure market-making revenue net of losses to better-informed traders, are lower by a factor of two-to-three times. This differential is attributable to the successful quot;cream-skimmingquot; of uninformed orders by off-NYSE market makers. These findings bolster existing concerns as to whether orders are routed so as to receive the best possible execution. Further, we question whether segmentation of the equity markets such that most price discovery occurs on the NYSE while most liquidity trades are diverted to competing markets can comprise a sustainable long-run equilibrium