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Execution Costs of Market Designs Worldwide duringthe Global Credit Crisis

We examine how institutional design features of the New York Stock Exchange, NASDAQ, London Stock Exchange, and the Tokyo Stock Exchange relate to execution costs during a period of extreme price volatility. The primary trading mechanisms examined in this article are pure limit order books, hybrid, and dealership markets. Consistent with Aitken et al. [2009], we adopt a multivariate framework incorporating a matching procedure to overcome bias in our sample selection. Our univariate statistics for spreads and volatility highlight the depths to which global equity markets collapsed during the height of the global financial crisis. Spreads are shown to increase by 98% and 100% on the NASDAQ and NYSE, respectively, in the four months following the collapse of Lehman Brothers. Volatility is shown similarly to increase sharply during that same period for all exchanges analyzed. Our multivariate results show that the hybrid market is most effective in reducing costs followed by the composite features of the NYSE, consistent with the theoretical model of Viswanathan and Wang [2002]. The pure LOB mechanism is found to be least effective during the 2007 to 2009 period.