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1、THEJOURNALOFFINANCE·VOL.LVI,NO.4·AUGUST2001AutomatedVersusFloorTrading:AnAnalysisofExecutionCostsontheParisandNewYorkExchangesKUMARVENKATARAMAN*ABSTRACTAglobaltrendtowardsautomatedtradingsystemsraisestheimportantquestionofwhetherexecutioncostsare,infact,lower
2、thanontradingfloors.Thispapercomparesthetradeexecutioncostsofsimilarstocksinanautomatedtradingstruc-ture~ParisBourse!andafloor-basedtradingstructure~NYSE!.ResultsindicatethatexecutioncostsarehigherinParisthaninNewYorkaftercontrollingfordifferencesinadversesel
3、ection,relativeticksize,andeconomicattributesacrosssamples.Theseresultssuggestthatthepresentformoftheautomatedtradingsystemmaynotbeabletofullyreplicatethebenefitsofhumanintermediationonatradingfloor.ATRADINGMECHANISMISDEFINEDbythedistinctivesetofrulesthatgove
4、rnthetradingprocess.Therulesdictatewhenandhoworderscanbesubmitted,whomayseeorhandletheorders,howordersareprocessed,andhowpricesareset~seeO'Hara~1995!!.Therulesoftradingaffecttheprofitabilityofvarioustradingstrategies~seeHarris~1997!!,andhenceaffecttraderbe-ha
5、vior,priceformation,andtradingcosts.Afundamentalquestioninsecu-ritiesmarketdesignisthelinkbetweentherulesofthetradingmechanismandthecostoftradeexecution.Numerousstudieshaveinvestigatedthisissuebycomparingbid-askspreadsintheauction-basedNewYorkStockExchange~NY
6、SE!andthedealer-basedNasdaq.1Whilemuchofthedebatecentersontherelativemeritsofauctionanddealermarkets,analternative*EdwinL.CoxSchoolofBusiness,SouthernMethodistUniversity.Thispaperbenefitedgreatlyfromtheadviceofmydissertationcommittee,HankBessembinder,WilliamC
7、hristie,JeffreyColes,andHerbertKaufman,andsuggestionsofananonymousreferee.Iamgratefulforcommentsreceivedfromparticipantsatthe2000FinancialManagementAssociationand2001AmericanFinanceAssociationannualmeetingsandseminarsatArizonaStateUniversity,SantaClaraUnivers
8、ity,SouthernMethodistUniversity,TexasTechUniversity,UniversityofArizona,UniversityofKansas,andUniversityofMiami.IalsothankJeffBacidore,JenniferConrad,GeorgeConstantinides,NaveenDaniel,Ven
