What Explains the Bid-Ask Spread Decline after Nasdaq Reforms?
Publication Type
Journal Article
Publication Date
2003
Abstract
This paper examines whether the decrease in bid2010ask spreads on Nasdaq after the 1997 reforms is due to a decrease in market2010making costs and/or an increase in market competition for order flows. Unlike previous studies, we jointly examine how competition and trading costs affect bid2010ask spreads. In addition, we separate the effects of informed trading and liquidity costs on bid2010ask spreads. Informed trading cost is directly estimated for each Nasdaq stock using a Bayesian theoretic model. Empirical results show that market2010making costs and competition significantly affect bid2010ask spreads. The post2010reform decrease in bid2010ask spreads is largely due to both an increase in competition and a decrease in informed trading and liquidity costs on Nasdaq.
Discipline
Business
Research Areas
Finance
Publication
Financial Markets, institutions and Instruments
Volume
12
Issue
5
First Page
347
Last Page
376
ISSN
0963-8008
Identifier
10.1046/j.0963-8008.2003.00002.x
Publisher
Wiley
Citation
WU, Chunchi and He, Yan.
What Explains the Bid-Ask Spread Decline after Nasdaq Reforms?. (2003). Financial Markets, institutions and Instruments. 12, (5), 347-376.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/792
Additional URL
https://doi.org/10.1046/j.0963-8008.2003.00002.x