Working Paper: NBER ID: w11556
Authors: Lance E. Davis; Larry Neal; Eugene N. White
Abstract: A surge in orders during the stock market boom of the late 1920s collided against the constraint created by the fixed number of brokers on the New York Stock Exchange. Estimates of the determinants of individual stock bid-ask spreads from panel data reveal that spreads jumped when volume spiked, confirming contemporary observers complaints that there were insufficient counterparties. When the position of the NYSE as the dominant exchange became threatened, the management of the exchange proposed a 25 percent increase in the number of seats in February 1929 by issuing a quarter-seat dividend to all members. While such a "stock split" would be expected to leave the aggregate value of the NYSE unchanged, an event study reveals that its value rose in anticipation of increased efficiency. These expectations were justified as bid-ask spreads became less sensitive to peak volume days after the increase in seats.
Keywords: NYSE; seat price; capacity constraints; bid-ask spreads; stock market efficiency
JEL Codes: N2; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the number of seats on the NYSE (G34) | increased efficiency in processing trades (G14) |
| increased efficiency in processing trades (G14) | decrease in bid-ask spreads (G19) |
| increase in the number of seats on the NYSE (G34) | decrease in bid-ask spreads (G19) |
| increase in number of seats (D72) | improved liquidity and efficiency (G14) |
| trading volume (G15) | bid-ask spreads (G19) |
| high trading volume (G15) | widened bid-ask spreads (G19) |
| fixed number of brokers (G24) | operational inefficiencies (D61) |