Study backs floor brokers over electronic exchanges

Study backs floor brokers over electronic exchanges

Academics at the University of Iowa and Baruch College of the City University of New York have published research showing favourable economic returns for floor brokers over electronic exchanges.

The study, to be published in the Journal of Business entitled 'The Economic Value of a Trading Floor: Evidence from the American Stock Exchange' was co-authored by Robert Schwartz, Puneet Handa and Ashish Tiwari.

According to the research, the key service provided by floor brokers is the timing, sizing, and pricing of the tranches of an order. The study suggests that using a floor broker is equivalent to placing a "smart" limit order as brokers can opportunistically seize liquidity without showing their hands too quickly.

"The analysis of non-block and quote data for 973 stocks during October 2001 found that cost savings are substantial when an order is entered by a floor broker," says Handa.

"This study re-affirms what we at the Amex have known for years," says Salvatore F. Sodano, chairman and CEC of the American Stock Exchange, "that the auction market with its trading floor and specialist firms offers individual investors valued-added services not found on electronic exchanges."

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