THE LIQUIDITY OF NYSE-LISTED FOREIGN STOCKS: FACTORS AFFECTING THE BID-ASK SPREAD
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This study compares the relative spreadfor dual listedforeign stocks trading on the New York Stock Exchange with domestic stocks ofcomparable volatility. Consistent with extant literature, it is shown that the spread is posi- tively related to total risk and negatively related to stock price and mean daily volume. The evidence for foreign stocks, in particular, suggests that investors pay no more for transacting in foreign equities than they do for trading domesticshares. Infact,specialistsmayactuallybeaggressivelycompetingforthismarketsegmentbyreducingthe spread they assess foreign transactions. This result is consistent with quasi-monopolist specialists providing their services in an integrated and extremely competitive marketplace. While Ifind no evidence that specialists increase the spread to compensate for asymmetric information, I do find a positive adjustment to compensate for a thinner market in foreign stocks.
Abstract
This study compares the relative spreadfor dual listedforeign stocks trading on the New York Stock Exchange with domestic stocks ofcomparable volatility. Consistent with extant literature, it is shown that the spread is posi- tively related to total risk and negatively related to stock price and mean daily volume. The evidence for foreign stocks, in particular, suggests that investors pay no more for transacting in foreign equities than they do for trading domesticshares. Infact,specialistsmayactuallybeaggressivelycompetingforthismarketsegmentbyreducingthe spread they assess foreign transactions. This result is consistent with quasi-monopolist specialists providing their services in an integrated and extremely competitive marketplace. While Ifind no evidence that specialists increase the spread to compensate for asymmetric information, I do find a positive adjustment to compensate for a thinner market in foreign stocks.