Trade Size and Components of the Bid-Ask Spread

The relation between theorized components of the bid-ask spread and trade size for a sample of NYSE firms is examined. We find that the adverse selection component increases uniformly with trade size. Conversely, order processing costs decrease with increases in trade size for all but the largest tr...

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Bibliographic Details
Published in:The Review of financial studies 1995-12, Vol.8 (4), p.1153-1183
Main Authors: Lin, Ji-Chai, Sanger, Gary C., Booth, G. Geoffrey
Format: Article
Language:English
Subjects:
Adverse selection
Bids
Business orders
Cost estimates
Costs
Gross profits
Nasdaq Composite Index
Order processing
Prices
Profits
Stock exchange
Stock exchanges
Stock prices
Trade
Trade finance
Trade regionalization
Trade volume
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Summary:The relation between theorized components of the bid-ask spread and trade size for a sample of NYSE firms is examined. We find that the adverse selection component increases uniformly with trade size. Conversely, order processing costs decrease with increases in trade size for all but the largest trades. We find that order persistence decreases with trade size. The adverse selection component is highest at the beginning of the day and lowest at the end of the day for all but the largest trades. Trades of NYSE firms executed on regional exchanges or NASDAQ contain a large order processing cost component but no significant adverse information effect.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/8.4.1153