A comparison of trade execution costs for NYSE and NASDAQ-listed stocks

We compare average trade execution costs during 1994 for sets of large, medium, and small capitalization stocks listed on the New York and NASDAQ stock markets. All measures of execution costs examined, including quoted bid-ask spreads, effective spreads (which allow for executions within the quotes), and realized spreads (which measure price reversal after trades), are larger for NASDAQ-listed than for NYSE-listed stocks. The differentials in average trading costs across exchanges are greater for medium and small capitalization issues than for large capitalization stocks and are greater for small compared to large trades. These differentials cannot be attributed to cross-exchange differences in the adverse selection costs of market-making. Furthermore, we find no evidence that average execution costs on NASDAQ declined after the publicized events of May 1994.