Does the Specialist Matter? Differential Liquidity Costs and Inter-Security Subsidization on the NYSE

This paper examines the differences in liquidity costs of trading among individual specialist firms for New York Stock Exchange (NYSE) listed securities. We employ a modification of the model developed by Madhavan, Richardson and Roomans (1994) to study the components of the effective spread. Using the identity of NYSE specialists assigned to each stock and the TAQ data base, we find a substantial difference in the effective spread and order processing cost across specialist firms after controlling for cross-sectional differences between assigned stocks. The differences in costs provide a useful measure of the relative performance of specialist firms and imply that the response to competition may differ across specialist firms. Within a specialist firm, there is a significant positive relation between order processing costs and trading activity controlling for other factors. Therefore, active stocks produce more per share revenue for NYSE specialists than inactive stocks. This finding ..