Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges

Authors

  • Kumar Venkataraman

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    • Edwin L. Cox School of Business, Southern Methodist University. This paper benefited greatly from the advice of my dissertation committee, Hank Bessembinder, William Christie, Jeffrey Coles, and Herbert Kaufman, and suggestions of an anonymous referee. I am grateful for comments received from participants at the 2000 Financial Management Association and 2001 American Finance Association annual meetings and seminars at Arizona State University, Santa Clara University, Southern Methodist University, Texas Tech University, University of Arizona, University of Kansas, and University of Miami. I also thank Jeff Bacidore, Jennifer Conrad, George Constantinides, Naveen Daniel, Venkat Eleswarapu, John Griffin, Jeffrey Harris, Brian Hatch, Mike Lemmon, Ananth Madhavan, Muku Santhanakrishnan, Bill Schwert, Hersh Shefrin, and Wanda Wallace for helpful comments and discussion. I am particularly grateful to Marianne Demarchi of the Paris Bourse for information on the institutional details of the exchange and for her comments. All errors are entirely my own.

Abstract

A global trend towards automated trading systems raises the important question of whether execution costs are, in fact, lower than on trading floors. This paper compares the trade execution costs of similar stocks in an automated trading structure (Paris Bourse) and a floor-based trading structure (NYSE). Results indicate that execution costs are higher in Paris than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples. These results suggest that the present form of the automated trading system may not be able to fully replicate the benefits of human intermediation on a trading floor.

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