Differences in individual NYSE specialists' performances and strategies

This paper shows that there exist differences in the performances of individual NYSE specialists in terms of the execution costs and participation strategies to the posted quotes and trades. We find that quoted and effective spreads, quoted depth, and number of trades that receive price improvement differ significantly across individual specialists. The explanatory power of the model as measured by adjusted R2 increases when we include the individual specialist dummies. Evidence suggests that some of the differences across specialist firms documented in the previous literature are due to the differences in individual specialists. We find that, as the trading frequency increases, order processing costs increase for the portfolios of the individual specialists which implies that specialists use profits from active stocks to subsidize inactive stocks in their portfolios. Using 2001 NYSE System Order Data in the decimal pricing environment, we also show that individual NYSE specialists differ significantly in their participation strategies to the posted quotes and trades. This suggests that there are significant differences in execution costs between specialists because they use different quoting and trading strategies.