By James Langton

(January 8 – 18:30 ET) – As part of its on-going inquiry into market fragmentation, the Securities and Exchange Commission’s Office of Economic Analysis today released a staff report comparing the costs of trading equities on Nasdaq with the New York Stock Exchange. The report finds Nasdaq generally faster, but pricier.

The report finds that on market orders of 100-499 shares for very large companies the average effective spreads are nearly equal. For 100-499 share market orders in the large, middle, and small categories, the first matched-pairs test shows the average Nasdaq effective spreads are from 5.7¢ to 11¢ per share wider than those for the matched NYSE stocks. For example, on a 300-share market order, the impact of the differences in the large, middle, and small categories would be an increase of between $8.50 and $16.50 a trade.

The report also finds that market order executions are generally faster on Nasdaq than on the NYSE for 100-499 share orders. Average execution times for Nasdaq stocks were faster in each of the four categories — 13.7 seconds less for the very largest stocks, and between 9.8 and 18.7 seconds less for the other three categories.

Nasdaq’s speed advantage appears to be limited to orders of less than 500 shares. The difference disappears for the 500-1,999 share market orders. The results indicate that the NYSE executions tend to be somewhat faster than the Nasdaq executions for 2,000-4,999 share market orders, but Nasdaq believes that many large “not held” orders are not properly identified in their system. It says this miscoding may reduce the accuracy of the comparison between the two markets for the largest category of orders.

In a speech today at Stanford Law School, SEC chairman Arthur Levitt said, “The study is a careful, independent attempt to apply an established methodology to data not previously available. And I believe the study also provides important indicators of the answer to the question it was designed to address. Its findings strongly suggest that order interaction improves the prices received by customers.”

Levitt notes that the report highlights challenges for both Nasdaq and the NYSE. “More broadly it provides context for the question of what immediate executions are worth to investors. One doesn’t need a crystal ball to predict some degree of convergence of the two market models, each attempting to develop strengths of the other. Indeed, both have concrete plans to do so. Yet if the study does nothing more than increase pressure on both markets to respond to the longstanding demands of investors, it will have served the public well.”