We examine how the intrinsic differences between U.S. and non-U.S. stocks affect market participants and the market quality of non-U.S. stocks relative to U.S. stocks. Using proprietary data on NYSE specialist trading, we find that, all else equal, specialist closing inventory positions for non-U.S. stocks are closer to zero than U.S. stocks. The evidence on specialist participation and stabilization rates is mixed. Non-U.S. stocks from developed markets have higher specialist participation and stabilization rates than U.S. stocks, while emerging market stocks have lower participation and stabilization rates than U.S. stocks. With respect to market quality, we find that, all else equal, non-U.S. stocks have wider spreads, less depth, and greater transitory volatility than U.S. stocks. We investigate the reasons behind the difference in liquidity and find that the larger non-U.S. spreads are primarily due to higher information asymmetry and increased adverse selection risk. We conclude that liquidity providers demand greater compensation for trading non-U.S. stocks, but this additional compensation is necessary to offset the higher adverse selection risk.

This paper examines empirically the magnitude and determinants of dealer trading by NYSE market makers (specialists) across stocks and over time. Across stocks, specialist dealer trading varies widely and is inversely related to trading volume and proxies for off-exchange competition. Over time in an individual stock, specialists participate more actively as sellers (buyers) when holding long (short) inventory positions. This results suggest that dealers control their inventory positions by selectively timing the size and direction of their trades rather than by adjusting their quotes. Further, specialists participate more in smaller trades and when the bid–ask spread is wide.