Market Design and Execution Cost for Matched Securities Worldwide

Abstract

This article employs the Reuters database to compare execution costs for 2,330 matched-pair securities across the top 7 equity markets in the Dow Jones STOXX® Global 1800 Index. This sample encompasses an extraordinarily wide variety of thirteen market design features, and the authors investigate execution costs well beyond the most heavily traded stocks to include equities in the sixth through tenth liquidity deciles. The findings indicate that full transparency of the limit order book to investors and a composite of unique NYSE features (but not the presence of the crowd) reduce effective spreads. In contrast, a fully transparent limit order book revealed to brokers, the presence of a market maker, or stamp duties and multiple execution systems on the LSE sharply increase effective spreads in both thickly and thinly traded stocks. The findings for price impact and realized spreads are the same with three exceptions. Trading floors markedly increase price impact while marginally decreasing realized spread. In thinly traded stocks, London9s multi-channel market and full transparency to brokers decrease price impact but increase realized spreads. Overall, the London Stock Exchange is the highest execution cost market, and the NYSE is the lowest.