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Reputation effects in trading on the New York Stock Exchange

Battalio, Robert, Ellul, Andrew and Jennings, Robert (2005) Reputation effects in trading on the New York Stock Exchange. Discussion paper, 540. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Theory suggests that reputations, developed in repeated face-to-face interactions, allow nonanonymous, floor-based trading venues to attenuate adverse selection in the trading process. We identify instances when stocks listed on the New York Stock Exchange (NYSE) experience a non-trivial relocation on the trading floor for reasons unrelated to execution quality. Although the specialist follows the stock to its new location, most floor brokers do not. We use this natural experiment to determine whether reputation appears to affect trading costs. We find a discernable increase in the cost of liquidity in the days surrounding a stock’s relocation. The increase is more pronounced for stocks with higher adverse selection and greater broker turnover. Using NYSE audit-trail data, we find that the floor brokers relocating with the stock obtain lower trading costs than those brokers who do not move and those that begin trading post-move in the days surrounding the move. Together, these results suggest that reputation plays an important role in the liquidity provision process on the floor of the NYSE.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2005 The Authors
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
G - Financial Economics > G1 - General Financial Markets > G10 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 540
Date Deposited: 30 Jul 2009 09:20
URL: http://eprints.lse.ac.uk/24659/

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