Bid-ask spreads on United States equity markets

Michael Aaron Goldstein, University of Pennsylvania


This paper analyzes the difference in the closing and effective bid-ask spreads of common stocks on NASDAQ and the U.S. stock exchange system for all of 1990. The sample includes stocks which are either listed on the NYSE or are NASDAQ NMS securities. These stocks were divided into those which exceeded the NYSE and NASDAQ NMS minimum market capitalization requirements of $18 million, and those which did not. After controlling for size by grouping into decile portfolios by market capitalization, the U.S. stock exchange system was found to have significantly smaller bid-ask spreads both in absolute terms and as a percentage of price. Parametric and non-parametric tests on pairs of NASDAQ NMS and U.S. stock exchange stocks matched by market capitalization also indicated that NYSE-listed stocks have significantly smaller displayed and effective bid-ask spreads. Multivariate regressions were also performed, controlling for size, volume, price, and variance. Heteroscedastistic-adjusted t-tests for these regressions also indicate smaller spreads on the U.S. stock exchange system for stocks that meet NYSE-listing requirements. Commission data for NYSE-listed stocks were then analyzed to estimate commission cost per share for different price categories. Even when U.S. stock exchange system spreads were increased by their average commission costs to account for the implicit commission costs found in NASDAQ spreads, the spreads on the U.S. stock exchange system were still found to be significantly smaller than on NASDAQ. These regression results were robust to controlling for the number of market makers. In addition, a model for variance of stock returns was created which included the existence of the bid-ask spread. The effects of the length of time over which the variance is calculated was examined, and the variance was found to be a function of the time period analyzed, volume, market capitalization and the bid-ask spread. Overall, these results provide evidence that a competitive specialist system may result in smaller spreads than a dealer market, although the effect diminishes for stocks with low market capitalization.

Subject Area


Recommended Citation

Goldstein, Michael Aaron, "Bid-ask spreads on United States equity markets" (1993). Dissertations available from ProQuest. AAI9331779.