THE DEALER AND MARKET CONCEPTS OF BID-ASK SPREAD - A COMPARISON FOR NASDAQ STOCKS

Two models of bid‐ask spread are estimated with a unique sample of matched observations of dealer spreads and market (inside) spreads for NASDAQ stocks. The estimates demonstrate that dealer and market spreads relate differently to their common determinants, indicating that the two measures are not interchangeable. Consequently, studies must select the spread concept that is appropriate to the hypothesis being tested to get unbiased estimates and correct interpretations of model parameters. In particular, the cost of immediacy to investors is measured directly by market spreads, while market‐making costs and interdealer competition relate directly to dealer spreads. © The Southern Finance Association and the Southwestern Finance Association