The Economic Value of a Trading Floor : Evidence from the American Stock Exchange

This paper provides evidence that floor brokers add value that helps offset the higher cost of accessing the trading floor, making it a desirable venue for orders requiring more careful handling. We compare execution costs of non-block trades handled by Amex floor brokers with trades entered through its automated Post Execution Reporting (PER) system. Essentially, because floor traders can opportunistically seize liquidity without showing their hands too quickly, using a floor broker is equivalent to placing a 'smart' limit order. Overall, floor trades have a lower realized half-spread than PER trades (-3.06 bps versus 4.43 bps). This finding holds for other measures of execution costs as well and is consistent across all order-size categories. The light our findings shed on the value of intermediation in security markets also has implications for automated trading systems