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The Effect of Dual Markets on Common Stock Market Making

Published online by Cambridge University Press:  19 October 2009

Frank K. Reilly  and
William C. Slaughter
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Extract

Over the years there has been a growing interest in the over-the-counter (OTC) trading of exchange-listed securities (known as the third market). Although the third market has flourished and its advantages have been expounded, it has not been possible to compare accurately the third market with organized exchanges because of an incomplete quotation system. On April 5, 1971, the National Association of Security Dealers Automatic Quotation (NASDAQ) system began including bid-and-ask quotations for 30 stocks listed on the New York Stock Exchange (NYSE); see Table 1.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 2 , March 1973 , pp. 167 - 182
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

1 For a discussion of third market advantages see West, Richard R., “Institutional Trading and the Changing Stock Market,” Financial Analysts Journal, vol. 27, no. 3 (May–June 1971), pp. 22–23CrossRefGoogle Scholar.

2 Armour, Lawrence A., “Central Marketplace,” Barron's (February 28, 1972)Google Scholar.

3 For a discussion of liquidity problems on the NYSE see, McClintick, David, “Illiquid Stocks — Lack of Ready Buyers and Sellers Imperils the Stock Market,” Wall Street Journal (December 10, 1971), p. 1Google Scholar; Fiske, Heide, “Can the Specialist Cope with the Age of Block Trading?” Institutional Investor, vol. 3, no. 8 (August 1969), pp. 29–34 and p. 89Google Scholar; Lyons, John F., “What Happens when Liquidity Disappears?,” Institutional Investor, vol. 3, no. 11 (November 1969), pp. 29–36 and p. 98Google Scholar; Richard R. West, “Institutional Trading.”

4 Smidt, Seymour, “Which Road to an Efficient Stock Market?,” Financial Analysts Journal, vol. 27, no. 5 (September–October 1971), pp. 18–19CrossRefGoogle Scholar.

5 See “The Specialist,” New York Stock Exchange, Inc. (December 1971)Google Scholar.

6 Reilly, Frank K., Page, William A., and Myers, Bruce L., “A Consideration of Factors that Influence Stock Market Efficiency — the New York and American Stock Exchanges Compared,” Working Paper No. 40, University of Kansas, School of BusinessGoogle Scholar.

7 “Statistical Bulletin,” (Washington, D.C.: Securities and Exchange Commission).

8 For a discussion of the equipment available with the new NASDAQ system, see Bleakley, Fred, “Is NASDAQ Really the Answer?,” Institutional Investor, vol. 5, no. 7 (July 1971), p. 23Google Scholar. Also, “NASDAQ and the OTC,” a booklet prepared by the OTC Information Bureau in cooperation with the National Security Traders Association and the National Association of Security Dealers, 1735 K. Street, N.W., Washington, D.C. 20006.

9 “The NASDAQ — Third Market Study,” National Association of Security Dealers, Inc. (April 1972).

10 Ibid., pp. 18–19.

11 Ibid., pp. 10–14.

12 Ibid., pp. 17–18.

19 Ibid., p. 23.

14 For an analysis of the spreads on the NYSE see, Demsetz, Harold, “The Cost of Transacting,” Quarterly Journal of Economics, vol. 82 (February 1968), pp. 33–53CrossRefGoogle Scholar. For an analysis of OTC spreads, see Tinic, Seha M. and West, Richard R., “Competition and the Pricing of Dealer Service in the Over-the-Counter Stock Market,” Journal of Financial and Quantitative Analysis, vol. 7, no. 2 (June 1972), pp. 1707–1723CrossRefGoogle Scholar.

15 In the studies by Demsetz and Tinic and West mentioned in footnote 14, price was considered to be a variable influencing the size of the spread and was found to be statistically significant in both studies.

16 For the test comparing two means see, Chou, Ya-lun, Statistical Analysis (New York, N.Y.: Holt Rinehart and Winston, Inc., 1969), pp. 319–321Google Scholar. The chi-square test is discussed in Chou, pp. 449–450.

17 “The NASDAQ - Third Market Study,” p. 22.

18 Ibid., p. 23.