An Analysis of Liquidity Across Markets : Execution Costs on the NYSE versus Electronic Markets

We examine liquidity across different types of markets by using execution costs as a proxy for liquidity. We conduct a thorough analysis of execution costs on the NYSE versus Electronic Markets. We adopt a variety of techniques attempting to correct for the selection bias problem. Unlike current literature, we find that Electronic Markets offer lower execution costs even after controlling for selection biases. In addition to controlling for selection biases at the sample average level of order difficulty, we also carry out our analysis at different levels of order difficulty, measured by a vector of control variables. Our results are robust under different model specifications. Finally, our what-if analysis shows that Electronic Markets' (the NYSE's) orders would have been worse (better) off, had they been executed by the NYSE (Electronic Markets). Overall, our results highlight the superiority of Electronic Markets' liquidity and execution quality