Cleaning House: Stock Reassignments on the NYSE

Abstract

A frequently occurring, yet unexplored, phenomenon of the New York Stock Exchange specialist system is that of reassignments of stocks by specialist firms on the floor of the Exchange. These events change the portfolios at the individual specialist level by reassigning one or more stocks from one individual specialist portfolio to another, and affect a large number of stocks. For instance, we document 194 such events involving 884 stocks over our 3-year sample period. We study the possible factors determining stock reassignments, and show the impact of these specialist firm decisions on the market quality and cost of capital of the reassigned stocks. Our results show that reassigned stocks have unusually wide spreads before reassignments and experience a decline in spreads to levels comparable to matched stocks after the reassignment. This improvement in liquidity is associated with a reduced cost of capital for the reassigned firms. Our analysis of the factors that determine the probability of a stock being reassigned indicate a prominent role for the industry and size concentration of the individual specialist portfolios in the decision of specialist firms to reassign stocks. We shed light on a hitherto unstudied segment of the market and provide an economic rationale for why the NYSE does not interfere with stock allocations after the initial allocation of new listings among specialists. Our study also has significant implications for the specialist system.