Reputation Effects in Trading on the New York Stock Exchange

Authors

  • ROBERT BATTALIO,

  • ANDREW ELLUL,

  • ROBERT JENNINGS

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    • Battalio is from the Mendoza College of Business at the University of Notre Dame. Ellul and Jennings are from the Kelley School of Business at Indiana University. We thank the NYSE for providing data. We thank an anonymous referee, Markus Brunnermeier, Shane Corwin, Thierry Foucault, Larry Harris, Frank Hatheway, Christian Lundblad, Thomas McInish, Marco Pagano, Tavy Ronen, Katherine Ross, Gideon Saar, Duane Seppi, Kumar Venkataraman, Ingrid Werner, and participants in seminars at Indiana University, London School of Economics, the NYSE, Oxford Financial Research Summer Symposium, Southern Methodist University, University of Kansas, University of Memphis, University of Notre Dame, Rutgers University, University of Utah, and participants at the 2006 American Finance Association and the Financial Economics and Accounting Conference at the University of Southern California. The opinions expressed in the paper do not necessarily reflect those of the employees, members, or officers of the NYSE.

ABSTRACT

Theory suggests that reputations allow nonanonymous markets to attenuate adverse selection in trading. We identify instances in which New York Stock Exchange (NYSE) stocks experience trading floor relocations. Although specialists follow the stocks to their new locations, most brokers do not. We find a discernable increase in liquidity costs around a stock's relocation that is larger for stocks with higher adverse selection and greater broker turnover. We also find that floor brokers relocating with the stock obtain lower trading costs than brokers not moving and brokers beginning trading post-move. Our results suggest that reputation plays an important role in the NYSE's liquidity provision process.

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