10 Henotesthatlargetradescausespreadstowiden,relative
to smalltrades,and hypothesizesthatthis isbecause large
trades are more likely to contain information.
Market Microstructure and Bid-Ask Spreads
Does the market in which a stock trades matter, when it
comes to how big the bid-ask spread should be? Studies
indicate that bid-ask spreads have historically been much
higher on the NASDAQ than on the New York Stock
Exchange, even after controlling for differences in the
variablesmentionedearlier—tradingvolumeandpricelevel.
Infact,thebid-askspreadsofstocksdropwhentheyswitch
from the NASDAQ to the NYSE.
11
A 1994 study by Christie and Schultz provided one
explanationforthephenomenon.Theyfoundthattherewere
adisproportionatelylargenumberof1/4quotesandfartoo
few 1/8 quotes.
12 TheyarguedthatdealersontheNASDAQwerecolluding
tosetquotestoohighandthatinvestorswerethereforepaying
the price with larger bid-ask spreads. This triggered an
investigation by the Securities and Exchange Commission
(SEC), which agreed that dealers were indeed engaged in
anticompetitivebehavior.Eventually,theexchangesettledthe
lawsuit for more than a billion dollars. An alternative
explanation is that the higher spreads on the NASDAQ
relative to the NYSE can be explained by structural
differencesacross themarkets.Consider, forexample,how
limitordersarehandledonthetwoexchanges.Thespecialists
ontheflooroftheNewYorkStockExchangearerequiredto
reflectintheirbid-askspreadthelimitpricesiftheyarebetter