How well do adverse selection components measure adverse selection? Financial Management, Autumn

The performance of five adverse selection models are examined by comparing their component estimates to other measures of information asymmetry and informed trading. The models produce mixed results. Adverse selection components correlate with various volatility measures, but appear unrelated to measures of uncertainty. Only three of the five models have the expected relation with informed trader proxies, suggesting that the adverse selection models measure adverse selection weakly at best. Spread also relates to many of the volatility measures, suggesting that some adverse selection components might be measuring some other cost of trading. One of the significant recent advancements in the market microstructure literature is the development of models that decompose the bid-ask spread into various components. In these models, the spread generally has three cost components: order processing, inventory holding, and adverse selection (or asymmetric information). Even though these microstructure models provide an important development in empirical finance, we know little about how well these models measure adverse selection and perform relative to each other. In the corporate finance literature, variables such as market-to-book, volatility, and institutiona

The effect of the sec\u27s order-handling rules on nasdaq

We study the effect of the implementation of new Securities and Exchange Commission order-handling rules—the Limit Order Display Rule, the Quote Rule, and the Actual Size Rule—on NASDAQ\u27s quoting and trading behavior. We find that the number of reported quotes increases and the bid-ask spread decreases following the implementation of the new rules. The decreased quoted depth associated with placement of individual investors\u27 limit orders—the Limit Order Display Rule—outweighs the increased quoted depth associated with displaying institutional quotes—the Quote Rule. Further, the number of trade executions increases while the average trade size decreases. The volatility of trade-to-trade and midpoint returns decreases for the initial group of stocks subject to the rules, but not for the two subsequent groups. © The Southern Finance Association and the Southwestern Finance Association

After-hours trading of NYSE stocks on the regional stock exchanges

A large number of New York Stock Exchange (NYSE)-listed stocks are traded on the Chicago, Philadelphia, and Pacific exchanges, and these exchanges have extended their trading hours to permit trading in NYSE-listed stocks after the close of trading on the NYSE. Demand for after-hours trading on the regional exchanges is limited. The Pacific Stock Exchange, which transacts less than 40% of the combined regionals\u27 trading volume during regular trading hours, captures more than 63% of the after-hours trades. We find that there is very little price discovery during after-hours trading. Almost all of the trades take place at either the NYSE closing ask, bid, or trade price. The most actively traded stocks intraday also tend to be the most actively traded stocks after hours. The percentage spreads and percentage half-spreads are significantly higher during the after-hours sessions on all three regional exchanges. Among the Chicago, Philadelphia, and Pacific exchanges, spreads are significantly lower after-hours on the Pacific exchange at the .10 level. Depth declines significantly during after-hours trading on the Chicago and Philadelphia exchanges and increases significantly on the Pacific exchange. © 2002 Published by Elsevier Science Inc