What Happened to Liquidity When World War I Shut the NYSE?

Abstract

The suspension of trading on the New York Stock Exchange for more than four months following the outbreak of World War I fostered a substitute market on New Street as a source of liquidity. The New Street market suffered from impaired price transparency because its transactions were not disseminated on the NYSE ticker and its quotations were blacklisted at the leading newspapers. This paper shows that despite the incomplete information flow and the somewhat wider bid-ask spreads compared with the New York Stock Exchange, New Street offered economically meaningful liquidity services. The interference with price transparency turned an individual stock’s reputation for liquidity into an important added variable in explaining the structure of bid-ask spreads on New Street.