A COMPARISON OF THE COST OF TRADING FRENCH SHARES ON THE PARIS BOURSEAND ON SEAQ INTERNATIONAL

This paper analyses the cost of trading French shares on two exchanges , the Paris Bourse and London's SEAQ International. Using a large data set consisting of all quotes, limit orders and transactions for a two month period, it is shown that for small transactions the Paris Bours e has lower implicit transaction costs, measured by both the effective and quoted bid-ask spread. The market in London, however, is deeper a nd provides immediacy for much larger trades. Moreover, we find that t he cost of trading is decreasing in trade size, rather than increasing over the range of trade sizes that we examine. This suggests that ord er processing costs are an important determinant of bid-ask spreads, s ince competing market microstructure theories (adverse selection, inve ntory control) predict bid-ask spreads increasing in trade size.