The Supply and Demand of Immediacy: Evidence from the NYSE

Abstract Participants in a trading market can be partitioned into suppliers of immediacy and demanders of immediacy, as Demsetz (1968) first noted. Suppliers of immediacy stand ready to trade at the prices they post, and demanders of immediacy place market orders and require immediate execution at posted prices. On the New York Stock Exchange (NYSE), immediacy is supplied by specialists, who post bid and/or ask quotes for their own accounts, by securities firms that place quotes for their own accounts, and by public traders, who place limit orders. The bid–ask spread is often used as a measure of the cost of immediacy to investors, but it is rare that the supplier of immediacy earns the entire spread. A supplier of immediacy earns the difference between the bid (ask) at which he buys (sells) and the subsequent price at which he sells (buys). Because prices tend to move against suppliers of immediacy, revenues on a round-trip trade are less than the spread. Consequently, revenues of suppliers of immediacy are typically less than the spread.