The study by the Securities and Exchange Commission defines spreads as the difference between what buyers pay and what sellers receive, with the difference kept by the broker or dealer.
Large, Small Differences
However, investors could be paying more for shares of other size companies on the NASDAQ – as much as $8.50 to $16.50 more on NASDAQ for a trade of 300 shares, according to the study, which did not accuse NASDAQ dealers of any wrongful acts. The study found a difference of 5.7 – 11 cents/share on orders of any but the largest companies.
Average execution times for NASDAQ stock were 13.7 seconds faster for the largest stocks, while trades for the rest were executed between 9.8 and 18.7 seconds for the other companies. The timing advantage disappears for market orders of more than 500 shares.
The SEC noted that there was no single, all-encompassing
measure of execution quality and that fast execution at a
guaranteed price might be more important in a particular
NASDAQ President Rick Ketchum noted that 40% of NASDAQ trading activity involve the very large company category. The SEC study also noted that the effective spread on trades in this category were 1.2 cents/share lower for the NASDAQ than the NYSE – but found the results “statistically insignificant.”
The study said that higher costs on NASDAQ could be a result of the market’s dealer-based trading structure, since dealers profit from the spread. The NYSE utilizes a system of stock specialist, who try to match buyers and sellers.
However, SEC officials said the study doesn’t point to one or the other exchange as more beneficial for investors.
The study was based on transactions in a one-week period (June 5, 2000 – June 9, 2000) and included 221 stocks, 25 of which were identified by NASDAQ as being their top stocks in terms of trading volume and market capitalization.
The report is at http://www.sec.gov/rules/othern/ordrxmkt.htm