TRADE SIZES AND THEORIES OF THE BID-ASK SPREAD

Relations between trade-size characteristics and the bid-ask spread ar e developed to distinguish among major theories of the spread. These t rade-size characteristics are determinants of the spread for NASDAQ/NM S stocks. They explain much of the cross-sectional variation in the sp read commonly associated with volume, volatility, and share price. Evi dence shows that order-processing costs are dominant relative to inven tory effects for low-price, small-capitalization, and low-volume stock s, but that the opposite is true for high-price, large-capitalization, and high-volume stocks. Inventory effects are more important relative to asymmetric information costs when stock price or capitalization is lower.