Manufacturing 'Orderliness' at the New York Stock Exchange
41 Pages Posted: 15 Apr 2014
Date Written: April 5, 2014
Stock markets are often thought to follow a "random walk." Recent events like the 2010 "flash crash" suggest price changes are discontinuous. To resolve this apparent paradox, we analyze the institutional details of the stock market. The design of trading mechanisms varies across exchanges because of the different ownership forms of exchanges. Different ownership generates different incentives to produce orderliness, or price stability. The implementation of Reg. NMS relaxed a constraint on trading NYSE-listed shares and allowing us to examine this hypothesis. Spreads for NYSE-listed shares that traded on the Nasdaq widened by 10% compared to trades on the NYSE.
Keywords: Capital markets, nonprofits, NASD dealer market, NYSE specialist market, institutional design
JEL Classification: G10, G14, K22, L1, L3
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