You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:


Log in to your personal account or through your institution.

The Economic Value of a Trading Floor: Evidence from the American Stock Exchange

Puneet Handa, Robert A. Schwartz and Ashish Tiwari
The Journal of Business
Vol. 77, No. 2 (April 2004), pp. 331-355
DOI: 10.1086/381279
Stable URL:
Page Count: 25
  • Download PDF
  • Cite this Item
The Economic Value of a Trading Floor: Evidence from the American Stock Exchange
We're having trouble loading this content. Download PDF instead.


By comparing execution costs of trades handled by Amex floor brokers with trades entered through its automated post execution reporting (PER) system, this article provides evidence that floor brokers have value. Because they can opportunistically seize liquidity, using a floor broker is equivalent to placing a “smart” limit order. Overall, floor trades have a lower realized half‐spread than PER trades (−3.06 bps vs. 4.43 bps). This finding holds for other measures of execution costs and is consistent across all order‐size categories. The analysis of the value of intermediation in a securities market has implications for automated trading systems.

Notes and References

This item contains 25 references.

  • ['Admati, Anat R., and Paul Pfleiderer. 1988. A theory of intraday patterns: Volume and price variability. Review of Financial Studies 1, no. 1:3–40.']
  • ['Amihud, Yakov, and Haim Mendelson. 1986. Asset pricing and the bid‐ask spread. Journal of Financial Economics 17, no. 2:223–49.']
  • ['Amihud, Yakov, Haim Mendelson, and Beni Lauterbach. 1997. Market microstructure and securities values: Evidence from the Tel Aviv Stock Exchange. Journal of Financial Economics 45, no. 3:365–90.']
  • ['Bessembinder, Hendrik, and Herbert M. Kaufman. 1997. A cross‐exchange comparison of execution costs and information flow for NYSE‐listed stocks. Journal of Financial Economics 46, no. 3:293–319.']
  • ['Brennan, Michael, and Avanidhar Subrahmanyam. 1996. Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics 41, no. 3:441–64.']
  • ['Conrad, Jennifer, Kevin M. Johnson, and Sunil Wahal. 2001. Alternative trading systems. Working paper, Emory University, Finance Department.']
  • ['Easley, David, and Maureen O’Hara. 1987. Price, trade size, and information in securities markets. Journal of Financial Economics 19, no. 1:69–90.']
  • ['Glosten, Lawrence, and Lawrence Harris. 1988. Estimating the components of the bid/ask spread. Journal of Financial Economics 21, no. 1:123–42.']
  • ['Hasbrouck, Joel. 1988. Trades, quotes, inventories, and information. Journal of Financial Economics 22, no. 2:229–52.']
  • ['Huang, Roger D., and Hans R. Stoll. 1994. Market microstructure and stock return predictions: A paired comparison of execution costs on NASDAQ and the NYSE. Review of Financial Studies 7, no. 1:179–213.']
  • ['———. 1996. Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE. Journal of Financial Economics 41, no. 3:313–57.']
  • ['———. 1997. The components of the bid‐ask spread: A general approach. Review of Financial Studies 10, no. 4:995–1034.']
  • ['Jain, Prem, and Gun‐Joh Gun‐Ho. 1988. The dependence between hourly prices and trading volume. Journal of Financial and Quantitative Analysis 23, no. 3:269–84.']
  • ['Keim, Donald B., and Ananth Madhavan. 1995. The anatomy of the trading process. Journal of Financial Economics 37, no. 3:391–98.']
  • ['———. 1996. The upstairs market for large‐block transactions: Analysis and measurement of price effects. Review of Financial Studies 9, no. 1:1–36.']
  • ['Kraus, Alan, and Hans Stoll. 1972. Price impacts of block trading on the New York Stock Exchange. Journal of Finance 27, no. 3:569–88.']
  • ['Kyle, Albert S. 1985. Continuous auctions and insider trading. Econometrica 53, no. 6:1315–35.']
  • ['Lee, Charles, and Mark Ready. 1991. Inferring trade direction from intraday data. Journal of Finance 46, no. 3:733–46.']
  • ['Maddala, Gangadharrao S. 1983. Limited dependent and qualitative variables in econometrics. New York: Cambridge University Press.']
  • ['———. 1996. Applications of the limited dependent variable models in finance. In Handbook of statistics, vol. 14, ed. Gangadharrao S. Maddala and Calyampudi R. Rao, pp. 553–66. Amsterdam: Elsevier/North Holland.']
  • ['Madhavan, Ananth, and Minder Cheng. 1997. In search of liquidity: Block trades in the upstairs and downstairs markets. Review of Financial Studies 10, no. 1:175–204.']
  • ['Madhavan, Ananth, Matthew Richardson, and Mark Roomans. 1997. Why do security prices change? A transaction‐level analysis of NYSE stocks. Review of Financial Studies 10, no. 4:1035–64.']
  • ['Pagano, Marco, and Ailsa Röell. 1992. Auction and dealership markets: What is the difference? European Economic Review 36, nos. 2–3:613–23.']
  • ['Sofianos, George, and Ingrid M. Werner. 1997. The trades of NYSE floor brokers. Working paper, New York Stock Exchange, New York.']
  • ['Venkataraman, Kumar. 2001. Automated versus floor trading: An analysis of execution costs on the Paris and New York exchanges. Journal of Finance 56, no. 4:1445–85.']