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Competition, Scale Economies, and Transaction Cost in the Stock Market

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  • Hamilton, James L.

Abstract

The opponents and proponents of competitive brokerage commission rates for the New York Stock Exchange have, for nearly a decade, been dueling in the hearing rooms of Congress and the Securities and Exchange Commission (SEC). The contest developed because financial institutions, in attempting to skirt the New York Stock Exchange (NYSE) and its fixed commission rates, had used a variety of trading practices that were sharply criticized by the government overseers of the securities markets. The securities industry, the government overseers, and scholars have debated what would be the most effective regulatory approach to improving the social performance of the securities marketplace. Would it be through initiating even more stringent federal regulation of exchange behavior? Or, would it be through selective deregulation to increase competition, particularly in the determination of commissions? Competitive forces might constrain and direct that behavior. The policy that has been developing would deregulate and restructure the marketplace to create a “central market system.” Competition would replace regulation to whatever extent may be possible, in determining both commission rates and the quality of marketplace services provided [6]. But, the contest has been long and often heated. From the thrusts and parries, there can be identified some fundamental issues concerning the economics of the stock exchange as a form of marketplace organization.

Suggested Citation

  • Hamilton, James L., 1976. "Competition, Scale Economies, and Transaction Cost in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(5), pages 779-802, December.
  • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:05:p:779-802_02
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    Cited by:

    1. Paresh Kumar Narayan & Sagarika Mishra & Seema Narayan, 2015. "New empirical evidence on the bid-ask spread," Applied Economics, Taylor & Francis Journals, vol. 47(42), pages 4484-4500, September.
    2. repec:dau:papers:123456789/295 is not listed on IDEAS
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    4. Vayanos, Dimitri & Wang, Jiang, 2012. "Market liquidity - theory and empirical evidence," LSE Research Online Documents on Economics 119044, London School of Economics and Political Science, LSE Library.
    5. Paul A. Laux, 1993. "Trade Sizes And Theories Of The Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 237-249, September.
    6. Ki C. Han, 1994. "The Effect Of The 1986 Tax Reform Act On Ex-Dividend Day Return Behavior," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 175-186, June.
    7. repec:dau:papers:123456789/3017 is not listed on IDEAS
    8. McConnell, John J. & Dybevik, Heidi J. & Haushalter, David & Lie, Erik, 1996. "A survey of evidence on domestic and international stock exchange listings with implications for markets and managers," Pacific-Basin Finance Journal, Elsevier, vol. 4(4), pages 347-376, December.
    9. Pronk, M., 2002. "Market liquidity around earnings announcements," Other publications TiSEM 3e22cd8d-f7eb-4c28-9275-8, Tilburg University, School of Economics and Management.
    10. Joseph H. Anthony, 1987. "The effect of information announcements on bid/ask spreads in the call options market," Contemporary Accounting Research, John Wiley & Sons, vol. 3(2), pages 460-476, March.
    11. Joseph J. Schultz Jr. & Sandra G. Gustavson & Frank K. Reilly, 1985. "Factors Influencing The New York Stock Exchange Specialists' Price-Setting Behavior: An Experiment," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(2), pages 137-144, June.
    12. Wenbin Tang & Hoang Nguyen & Van Nguyen, 2013. "The effects of listing changes between NASDAQ market segments," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(4), pages 584-605, October.
    13. James L. Hamilton, 1991. "The Dealer And Market Concepts Of Bid-Ask Spread: A Comparison For Nasdaq Stocks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(2), pages 129-139, June.
    14. V. Boinet & A. Gregoriou & C. Ioannidis, 2008. "Nonlinear adjustment of investors' holding periods for common stocks in the presence of unobserved transactions costs: evidence from the UK equity market," Applied Financial Economics, Taylor & Francis Journals, vol. 18(15), pages 1221-1231.

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