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Competing with the NYSE

By Harvard Law School Program on Corporate Governance

(Editor’s note: This post comes from Harold Mulherin of the Terry College of Business at the University of Georgia, and William Brown and Marc Weidenmier of Claremont McKenna College)

For a significant part of its 213-year history, the New York Stock Exchange (NYSE) has reigned as the leading stock exchange both within the United States and across the world. Recently, ongoing changes in technology and the globalization of stock trading have given rise to a number of competitors that threaten the NYSE?s position as the preeminent stock exchange. These changes, as well as the NYSE?s proposed merger with Archipelago, raise many questions about the effects of direct stock market competition with the NYSE.

In a forthcoming article in the Quarterly Journal of Economics, Competing with the NYSE, we investigate whether the NYSE is susceptible to significant competition. We provide new evidence on both the viability and the nature of direct trading competition with the NYSE. We study the Consolidated Stock Exchange, a rival stock exchange that competed directly with the ?Big Board? from 1885 to 1926. For almost 42 years, the Consolidated was an important competitor and garnered an average annual market share reaching as high as 60 percent of NYSE trading volume. This sustained incidence of competition with the NYSE came at a time of significant technological change in securities trading and thereby has direct relevance to the current competitive forces confronting the NYSE today.

Our analyses focuses on the effects of competition on the bid-ask spreads for NYSE stocks. We employ two complementary tests to identify the effects of stock market competition. We first study the impact of competition on bid-ask spreads when the Consolidated began to trade NYSE stocks in 1885. Then we analyze the effects of competition on bid-ask spreads for approximately 40 years of the stock exchange rivalry. Our results suggest that NYSE bid-ask spreads fell by more than 10 percent when the Consolidated began to trade NYSE stocks while bid-ask spreads for our control group of stocks trading on the regional exchanges remain unchanged. The effect persisted across the 42-year rivalry between the two exchanges. The finding is robust to a wide variety of changes in the empirical model and estimation technique. Overall, our results suggest that the NYSE has faced significant long-run competition and may be susceptible to a similar level of competition in the future.

The full paper is available for download here.

Full post as published by The Harvard Law School Corporate Governance Blog on August 20, 2008 (boomark / email).