Competition to provide liquidity on the New York Stock Exchange

Abstract In order to be successful in attracting trading volume and generate revenue from trading fees, exchanges must allow potential traders to transact quickly at a known price. This is known as providing liquidity. On the New York Stock Exchange, liquidity comes from two sources: traders conducting business on the floor of the exchange and those who electronically send orders to the exchange from off-floor locations. On-floor traders have traditionally been alleged to have advantages over off-floor traders. If that is the case, then this might discourage off-floor traders from providing liquidity and reduce the efficiency of security markets. We find that on-floor traders do seem to enjoy some advantages in providing liquidity, although the differences are not great. This suggests that the New York Stock Exchange is warranted in several of its recent initiatives designed to level the playing field between on- and off-floor traders.