We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is larger when Nasdaq market makers avoid odd-eighth quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs significantly reduce trading volume, but do not have a significant effect on prices. Journal of Economic Literature Classification Numbers: G10, G14.
Bibliographical noteFunding Information:
* We thank Raghu Rajan, an anonymous referee, participants of the JFI Conference on Liquidity at Washington University, and seminar participants at Tel-Aviv University and Hebrew University for helpful comments. Eugene Kandel thanks the Harvey Krueger Center for financial support. Please direct correspondence to Leslie M. Marx, W. E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627, phone 716/275-2993, fax 716/461-4592, e-mail email@example.com.