THE LIQUIDITY OF NYSE-LISTED FOREIGN STOCKS: FACTORS AFFECTING THE BID-ASK SPREAD

This study compares the relative spread for dual listed foreign stocks trading on the New York Stock Exchange with domestic stocks of comparable volatility. Consistent with extant literature, it is shown that the spread is positively related to total risk and negatively related to stock price and mean daily volume. The evidence for foreign stocks, in particular, suggests that investors pay no more for transacting in foreign equities than they do for trading domestic shares. In fact, specialists may actually be aggressively competing for this market segment by reducing the spread they assess foreign transactions. This result is consistent with quasi-monopolist specialists providing their services in an integrated and extremely competitive marketplace. While I find no evidence that specialists increase the spread to compensate for asymmetric information, I do find a positive adjustment to compensate for a thinner market in foreign stocks.