THE EFFECTS OF TRANSACTION COSTS ON STOCK-PRICES AND TRADING VOLUME

We study the effects of changes in bid-ask spreads on the prices and t rading volumes of stocks that move from Nasdaq to the NYSE or Amex and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in s preads is larger when Nasdaq market makers avoid odd-eighth quotes. Wh en stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transactio n costs significantly reduce trading volume, but do not have a signifi cant effect on prices. (C) 1998 Academic Press.