Price Improvement and Price Discovery on a Primary Market

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Abstract
This article analyzes the relationship between price improvement and price discovery on American Stock Exchange. The authors present empirical evidence based on October 1996 quote and transaction data on the magnitude and frequency of price improvement and on price improvement's relationship to price discovery. Price improvement in the period was substantial, averaging 1.43 cents per share for orders delivered by the Amex's electronic order delivery system (PER) and 6.81 cents per share for orders entered non-electronically. The empirical evidence presented suggests that buy an sell orders are selectively price-improved at the Amex, depending on current market conditions, and thus that price improvement is linked to price discovery. These findings have implications for order flow consolidation in a major market center.

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