Three Essays in Market Microstructure

This dissertation consists of three essays. The first essay examines the liquidity impact of NASDAQ security cross-listings on the American Stock Exchange (Amex). Using a comprehensive sample of cross-listing equities, transactions data obtained from the NYSE Trade and Quote (TAQ) database, and market data obtained from the Center for Research in Securities Pricing (CRSP) database, I find positive abnormal returns on days when positive news is released regarding security cross-listings. This indicates that cross-listing creates value for cross-listing firms. I also document significant decreases in trading costs of the cross-listed securities around the cross-listing date. In general, market participants perceive exchange competition to create value, and in the case of Amex cross-listing the NASDAQ 100, trading costs decrease significantly around the cross-listing date.

The second essay examines adverse selection costs in basket securities. I compare the adverse selection costs of exchange traded funds against a matched sample of equities. I document lower quoted and effective spreads and higher quoted depth in exchange traded funds relative to a matched sample of equities. I also examine how industry and security concentration in basket securities influences trading and adverse selection costs. I find increased quoted and effective spreads and lower depth in industry concentrated and international basket securities. The results of this essay have a direct impact on the trading decisions of individual and institutional investors, and on fund management firms that sponsor the creation of exchange traded fund products.

The third essay examines the impact of the introduction of nine Sector Standard and Poor Depository Receipts on the underlying securities. I employ a Seemingly Unrelated Regression model to measure the changes in liquidity of the underlying equities around the introduction of the Sector Standard and Poor Depository Receipts. I examine the changes in adverse selection costs in the underlying securities around the introduction of the concentrated basket securities. The third essay is the first examination of the liquidity impact of Sector specific exchange traded fund on the underlying equities