Abstract
In October 2006, the NYSE began rolling-out phase three of a four-phase plan initiate its new Hybrid trading mechanism. The results show that this new trading platform introduced a much larger proportion of electronic transactions relative to floor auction transactions. This migration to electronic transactions is further evidenced by a mirror shift in price discovery from floor trades to trades marked for automatic electronic execution. In addition, the move to Hybrid trading introduced a significant decrease in inventory control costs, as well as a noticeable increase in trade persistence. Finally, the new trading platform has increased the speed with which orders are met, and has also decreased the proportion of executed shares which receive price improvement.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Note that categories are determined by order size, while the share weighting is based on executed shares. For example, an order for 3,000 shares might execute in two equal parts, each part with a different execution result. The results would be weighted by the shares executed and reported in Group 3 even though it executed in two parts each of which would be classified by Group 2. The purpose is to represent the expected execution results for the order submitted.
The combination of the best bid and the best offer across all quotes is referred to as the National Best Bid and Offer (NBBO). This is the quote that is used to benchmark Dash5 data. Unless otherwise indicated, any reference to quoted spreads means the NBBO.
Under the Dash5 data, execution prices are compared to the prevailing NBBO at the time order arrival, and execution times are also calculated with respect to order arrival times. The TAQ data do not provide information on order arrival times. Hence execution quality is often calculated by comparing the execution price to the quote at the time of execution (rather than the time of arrival). The order arrival benchmark is more appropriate than an execution time benchmark because the effective spread will reflect any price movements that occur while an order is being executed. These price movements reflect real costs to traders and may differ across market centers.
It should be noted that the results for market orders are easier to interpret than those for marketable limit orders. The reasons for this are twofold. First, the Dash5 reports do not include information on the opportunity cost of non-execution. As a result, ex post execution costs for marketable limits will understate their true cost. Second, the time-to-execution for this order type is censored, because expired and cancelled orders are not considered in the calculation.
References
Baillie RT, Booth GG, Tse Y, Zabotina T (2002) Price discovery and common factors models. J Financial Mark 5:309–321
Benston GJ, Wood RR (2008) Why effective spreads on Nasdaq were higher than on the New York stock exchange in the 1990s. J Empir Finance 15:17–40
Boehmer E (2005) Dimensions of execution quality: recent evidence for U.S. equity markets. J Financial Econ 78:553–582
Boehmer E, Jennings R, Wei L (2006) Public disclosure and private decisions: equity market execution quality and order routing. Rev Financial Stud 20:315–358
Booth GG, Lin J, Martikainen T, Tse Y (2002) Trading and pricing in upstairs and downstairs stock markets. Rev Financial Stud 15:1111–1135
de Jong F (2002) Measures of contribution to price discovery: a comparison. J Financial Mark 5:323–327
Easley D, O’Hara M (1987) Price, trade size, and information securities markets. J Financial Econ 19:69–90
Eun CS, Sabherwal S (2003) Cross-border listings and price discovery: evidence from U.S.-listed Canadian stocks. J Finance 58:549–576
Fleming J, Ostdiek B, Whaley RE (1996) Trading costs and the relative rates of price discovery in stock, futures, and options markets. J Fut Mark 16:353–387
Frino A, Harris H, McInish T, Tomas MJ (2004) Price discovery in the pits: the role of market makers on the CBOT and the Sydney futures exchange. J Fut Mark 24:785–804
Gonzalo J, Granger CWJ (1995) Estimation of common long-memory components of cointegrated systems. J Bus Econ Stat 13:27–36
Harris FH, McInish TH, Wood RA (2002) The dynamics of price adjustment across exchanges: an investigation of price discovery for Dow stocks. J Financial Mark 5:277–308
Hasbrouck J (1991) Measuring the information content of stock trades. J Finance 46:179–207
Hasbrouck J (1995) One security, many markets: determining the contributions to price discovery. J Finance 50:1175–1199
Hasbrouck J (2002) Stalking the “efficient price” in market microstructure specifications: an overview. J Financial Mark 5:329–339
He C, Odders-White E, Ready M (2006) The impact of preferencing on execution quality. J Financial Mark 9:246–273
Hendershott T, Jones C (2005) Trade-through prohibitions and market quality. J Financial Mark 8:1–23
Lee C, Ready M (1991) Inferring trade direction from intraday data. J Finance 46(2):733–746
Lehmann BN (2002) Some desiderata for the measurement of price discovery across markets. J Financial Mark 5:259–276
Lipson M (2004) Competition among market centers. Working paper, University of Virginia
Schwartz RA, Byrne JA, Colaninno A (2006) Electronic vs floor based trading (Zicklin school of business financial markets conference series Baruch college, CUNY). Springer Science+Business Media, Inc, New York
Stoll HR (2006) Execution quality on the NYSE: the effect of time delay. Available at SSRN: http://ssrn.com/abstract=941803
Acknowledgments
We are grateful to two anonymous reviewers and the participants at the 2007 FMA meeting in Orlando and the 2008 MFA meeting in San Antonio for valuable comments and suggestions.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Trade conditions
Regular trade | * | A trade made without any stated condition |
Bunched | B | A trade representing an aggregate of two or more regular trades (other than the opening or reopening trade) that were executed within the same 60 s period at the same price |
Cash sale | C | A transaction which calls for the delivery and payment of securities on the same day the trade took place |
NYSE direct+ | E | The high-speed electronic connection for immediate automatic execution of limit orders |
Rule 127 trade | J | NYSE trade reported as having been executed as a block position |
Sold last | L | A transaction that occurs in sequence but is reported to the tape at a later time; there are no intervening trades between the time the transaction occurs and when it is reported |
Next day | N | Calls for delivery of securities on the first business day following the day of the contract |
Opened last | O | Opening trade that occurs in sequence but is reported to the tape at a later time |
Prior reference | P | An executed trade that occurred in a marketplace where members execute certain transactions that actually relate to an obligation to trade at an earlier point in the trading day or that refer to prior referenced price. (NASD only) |
Seller | R | “Seller’s Option”. Delivery date is specified by the seller and must be between two and sixty calendar days following the day of the contract (but not on the third business day after the trade date, which is considered a regular trade) |
Pre and post close | T | A trade that occurred within the current trading day, but is executed outside of the current market hours. (NASD only) |
Out of order | U | As of September 1, 2005, Nasdaq required early pre-CT hours trades to be reported with a condition code of U. These trades can be reported to the tape anytime between 8:00 a.m. and 6:30 p.m. |
Sold sale | Z | A transaction that is reported to the tape at a time later than it occurred and when other trades occurred between the time of the transaction and its report time |
Rights and permissions
About this article
Cite this article
Gutierrez, J.A., Tse, Y. NYSE execution quality subsequent to migration to hybrid. Rev Quant Finan Acc 33, 59–81 (2009). https://doi.org/10.1007/s11156-008-0101-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11156-008-0101-z