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This dissertation examines the determinants of widening bid-ask spreads near the open and close of the New York Stock Exchange (NYSE). In particular, I explore whether inelastic demand to trade and imperfect competition for order flow at these times allows NYSE specialists to price discriminate as hypothesized by Brock and Kleidon (1992). I estimate order processing and adverse selection costs in quoted bid-ask spreads throughout the trading day using the model of George, Kaul and Nimalendran (1991).
In a sample of 200 actively-traded NYSE firms, order processing cost estimates rise dramatically near the open and close of the market. On the average day, NYSE order processing costs rise by 2-3 cents (or 12-18%) near both the close and the open of the market. In a sample of 100 actively-traded Nasdaq firms, order processing cost estimates decline continually throughout the trading day. Taken together, this evidence suggests that NYSE specialists price discriminate near the open and close of the market.
In addition, I find NYSE order processing cost estimates are larger near Friday's close and Monday's open relative to other weekdays, a pattern not found in the multiple dealer Nasdaq market. Furthermore, I find NYSE order processing cost estimates to be larger near Friday's close and Monday's open on option expiration weekends. At the extreme, I find that NYSE specialists charge up to 11 cents (nearly 50%) more per share in order processing costs to execute trades near the open on Mondays following option expirations and near the close on Fridays prior to expirations.
As a robustness check, I explore whether order processing costs are driven by a set of other factors known to affect quoted spreads. I find that risk, trade size, volume of trade, price and regional trading volume explain less than half of the cross-sectional variation in order processing costs, suggesting intraday variation in NYSE order processing costs is not solely caused by these other factors. I conclude that the widening NYSE spreads near the open and close of the market can be attributed to price discrimination by NYSE specialists.