Price Pressure on the NYSE and Nasdaq: Evidence from S&P 500 Index Changes

Using additions of NYSE- and Nasdaq-listed firms to the S&P 500, between 1989 and 2000, we explore the price effects of noninformation related demand shocks. After controlling for various firm characteristics, index fund growth, and arbitrage risk, we find that NYSE stocks suffer less pronounced price effects than do Nasdaq stocks on the day stocks are added to the Index. For NYSE stocks, this effect is reversed immediately, but Nasdaq stocks show a partial reversal taking place over several days. We interpret this result as evidence of the superiority of the specialist system over the dealer system in mitigating price pressures.