The Effect of Automated Trading on Market Quality: Evidence from the New York Stock Exchange

  • Andreas Storkenmaier
  • Ryan Riordan
Conference paper
Part of the Lecture Notes in Business Information Processing book series (LNBIP, volume 23)


From the end of 2006 until the beginning of 2007 the NYSE introduced the NYSE Hybrid Market on a rolling basis. The NYSE Hybrid Market significantly changed the NYSE’s market model and supports automated execution for almost unlimited order sizes and different order types. The introduction of the Hybrid Market was driven by fundamental changes in the securities trading industry over the last years. This paper analyzes the effect of the NYSE Hybrid Market on market quality through analyzing different spread measures and price impact. Results show that the introduction of the Hybrid Market reduced trading costs and improved execution quality at the NYSE.


NYSE Hybrid Market Market Quality Liquidity Automatic Execution Trading Technology 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Abrokwah, K., Sofianos, G.: Execution quality at the new, fast nyse. Journal of Trading (2008) (Winter, forthcoming)Google Scholar
  2. 2.
    Arellano, M.: Computing robust standard errors for within-groups estimators. Oxford Bulletin of Economics and Statistics 49(4), 431–434 (1987)CrossRefGoogle Scholar
  3. 3.
    Barclay, M.J., Litzenberger, R.H., Warner, J.B.: Private information, trading volume, and stock-return variances. The Review of Financial Studies 3(2), 233–253 (1990)CrossRefGoogle Scholar
  4. 4.
    Bessembinder, H.: Issues in assessing trade execution costs. Journal of Financial Markets (6), 233–257 (2003)Google Scholar
  5. 5.
    Bessembinder, H., Kaufman, H.M.: A comparison of trade execution costs for nyse and nasdaq-listed stocks. The Journal of Financial and Quantitative Analysis 32(3), 287–310 (1997)CrossRefGoogle Scholar
  6. 6.
    Bessembinder, H., Kaufman, H.M.: A cross-exchange comparison of execution costs and information flow for nyse-listed stocks. Journal of Financial Economics 46, 293–319 (1997)CrossRefGoogle Scholar
  7. 7.
    Boehmer, E.: Dimensions of execution quality: Recent evidence for US equity markets. Journal of Financial Economics 78, 553–582 (2005)CrossRefGoogle Scholar
  8. 8.
    Boehmer, E., Broussard, J.P., Kallunki, J.P.: Using SAS in Financial Research. SAS Institute Inc., Cary (2002)Google Scholar
  9. 9.
    Boehmer, E., Saar, G., Yu, L.: Lifting the veil: An analysis of pre-trade transparency at the NYSE. The Journal of Finance 62(2), 783–815 (2005)CrossRefGoogle Scholar
  10. 10.
    Domowitz, I., Steil, B.: Automation, trading costs, and the structure of the securities trading industry. Brookings-Wharton Papers on Financial Services, pp. 33–82 (1999)Google Scholar
  11. 11.
    Easley, D., Hendershott, T., Ramadorai, T.: The price of latency. Working Paper, Cornell University, University of California at Berkley, and University of Oxford and CEPR (Version 21 May 2008), (accessed July 17, 2008)
  12. 12.
    Easley, D., O’Hara, M.: Price, trade size, and information in securities markets. Journal of Financial Economics 19, 69–90 (1987)CrossRefGoogle Scholar
  13. 13.
    Gajewski, J.F., Gresse, C.: Centralised order books versus hybrid order books:a paired comparison of trading costs on nsc (euronext paris) and sets (london stock exchange). Journal of Finance and Banking 31, 2906–2924 (2007)CrossRefGoogle Scholar
  14. 14.
    Glosten, L.R., Milgrom, P.R.: Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics 14, 71–100 (1985)CrossRefGoogle Scholar
  15. 15.
    Hasbrouck, J.: Measuring the information content of stock trades. The Journal of Finance 46(1), 179–207 (1991)CrossRefGoogle Scholar
  16. 16.
    Hendershott, T., Jones, C.M., Menkveld, A.J.: Does algorithmic trading improve liquidity. Working Paper, Haas School of Business University of California at Berkeley, Graduate School of Business Columbia University, and VU University Amsterdam Tinbergen Institute (Version 26 April 2008), (accessed May 10, 2008)
  17. 17.
    Hendershott, T., Moulton, P.C.: The shrinking new york stock exchange floor and the hybrid market, Working Paper, Haas School of Business and Fordham Graduate School of Business (2007), (accessed May 20, 2008)
  18. 18.
    Hendershott, T., Moulton, P.C.: Speed and stock market quality: The nyse’s hybrid. Working Paper, Haas School of Business and Fordham Graduate School of Business (2008), (accessed October 5, 2008)
  19. 19.
    Jain, P.K.: Financial market design and the equity premium: Electronic versus floor trading. The Journal of Finance 9(6), 2955–2985 (2005)CrossRefGoogle Scholar
  20. 20.
    Kinney, C.: Electronic and floor-based trading: The NYSE hybrid market. In: Schwartz, R.A., Byrne, J.A., Colaninno, A. (eds.) Electronic and Floor-Based Trading. Zicklin School of Business Financial Markets Series, ch. 7, pp. 111–120. Springer, Boston (2006)CrossRefGoogle Scholar
  21. 21.
    Kyle, A.S.: Continuous auctions and insider trading. Econometrica 53(6), 1315–1336 (1985)CrossRefGoogle Scholar
  22. 22.
    Lee, C.M.C., Ready, M.J.: Inferring trade direction from intraday data. The Journal of Finance 46(2), 733–746 (1991)CrossRefGoogle Scholar
  23. 23.
    Madhavan, A., Sofianos, G.: An empirical analysis of nyse specialist trading. Journal of Financial Economics 48, 189–210 (1998)CrossRefGoogle Scholar
  24. 24.
    NYSE: Hybrid market training program (2006), (accessed May 21, 2008)
  25. 25.
    NYSE: NYSE hybrid market FAQ (2006), (accessed May 21, 2008)
  26. 26.
    SEC: Release No. 34-51808 (June 9, 2005): Regulation NMS. U.S. Securities and Exchange Commission (2005)Google Scholar
  27. 27.
    SEC: Release No. 34-53539 (March 22, 2006): Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 5 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 6, 7, and 8 to the Proposed Rule Change to Establish the Hybrid Market. U.S. Securities and Exchange Commission (2006)Google Scholar
  28. 28.
    Sofianos, G., Werner, I.M.: The trades of nyse floor brokers. Journal of Financial Markets 3, 139–176 (2000)CrossRefGoogle Scholar
  29. 29.
    Venkataraman, K.: Automated versus floor trading: An analysis of execution costs on the paris and new york exchanges. The Journal of Finance 56(4), 1445–1485 (2001)CrossRefGoogle Scholar
  30. 30.
    Weber, B.: Transformation of trading at the new york stock exchange, 1980-2007. Working Paper, London Business School, Version 9 April 2008. Journal of Management Information Systems (submitted, 2008)Google Scholar
  31. 31.
    Werner, I.M.: Nyse order flow, spreads, and information. Journal of Financial Markets 6, 309–335 (2003)CrossRefGoogle Scholar
  32. 32.
    White, H.: A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48(4), 817–838 (1980)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2009

Authors and Affiliations

  • Andreas Storkenmaier
    • 1
  • Ryan Riordan
    • 1
  1. 1.Institute of Information Systems and Management (IISM)University of KarlsruheKarlsruheGermany

Personalised recommendations