Does the Specialist Matter? Differential Execution Costs and Intersecurity Subsidization on the New York Stock Exchange





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    • Cao and Hatheway are from Pennsylvania State University. Choe is from Seoul National University. We appreciate the comments made by an anonymous referee, participants at the 1995 Conference on Financial Economics and Accounting at the University of Maryland, the 1996 Utah Finance Conference, the 1996 European Finance Association Meetings in Oslo, and the 1996 Financial Management Association Meetings in New Orleans; by seminar participants at the Pennsylvania State University; and by Jim Angel, David Becher, Russ Ezzell, Gordon Hanka, Burton Hollifield, Eugene Kandel, Bill Kracaw, Ananth Madhavan, Chris Muscarella, Harold Mulherin, Leonard Schneck, Dennis Sheehan and Ren6 Stulz. We also benefited from conversations with Joel Hasbrouck, Roger Huang, Charles Lee, Matthew Spiegel, and Hans Stoll. We thank Linda Corbin, Brian McNamara, James Shapiro, and George Sofianos of the NYSE, Robert Seijas of Merrill Lynch Specialist, Inc., and Bruce Harvey and Jack Shaw of Wagner, Stott and Co. for their descriptions of the workings of the NYSE. All errors are our own.


This article tests for differences in execution costs among specialist firms for New York Stock Exchange listed securities. Execution cost differences provide a measure of the relative performance of specialist firms. We find a substantial difference in effective spreads and order processing costs across specialist firms, controlling for stock characteristics. While economically significant, the differences in execution costs between specialist firms are much smaller than the cross-market differences reported by Huang and Stoll (1996). Within a specialist firm, there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks.