Performance Evaluation of New York Stock Exchange Specialists

Abstract

This study's purpose was to construct a performance criterion for New York Stock Exchange specialists which relates to their ability to affect price variability. It was emphasized that the price-setting behavior of the specialists, at times when trading imbalances prevail in the market, is the most important aspect of their performance. Their performance in this dimension may or may not be associated with their willingness to supply immediacy services to small orders. While the bid-ask spread is the correct variable to measure when the latter is considered, price variability or, more precisely, the functional relationship between price changes and trading imbalances is the variable to be measured when the price-setting behavior is of interest. While the experiment to evaluate the price-setting behavior of NYSE specialists using publicly available data may be considered a pioneer study, other studies have estimated the determinants of the bid-ask spread. The contributions of this study to the analysis of the spread can be summarized as follows: (a) observing an independent “specialist effect” on the size of the spread, (b) estimating the spread-volume relationships using a simultaneous system, and (c) estimating the association between the specialists' performance on both spread and price dimensions of their activity. The finding of this study is that there is a positive correlation between the quality measure of performance on both dimensions.