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May 31, 2004

The Value of Floor Broker Executions

By Staff Reports

Electronic executions are credited with reducing transaction costs on U.S. equity markets. Now there is evidence that manual style-order handling may in some cases be better for investors. That's the conclusion of an academic study, which compares non-block trades handled by floor brokers on the American Stock Exchange, with its automated post execution reporting system (PER).

The authors are Puneet Handa, University of Iowa; Robert Schwartz, Baruch College, CUNY, and Ashish Tiwari, University of Iowa.

The study notes that, "trades handled by floor brokers have a significantly smaller realized half-spread than do PER trades (-3.06bps vs. 4.43 bps). This difference of 7.49 bps [basis points] is equivalent to a savings of 3.94 cents per share for an average priced stock on the Amex." The study contends that, based on the sample's floor trading volume, the monthly savings came to $4.36 million.