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Information Disclosure and Market Quality: The Effect of SEC Rule 605 on Trading Costs

Published online by Cambridge University Press:  06 April 2009

Xin Zhao  and
Kee H. Chung
Xin Zhao
Affiliation:
[email protected], Pennsylvania State University at Erie, Behrend College, 5101 Station Rd, Erie, PA 16563
Kee H. Chung
Affiliation:
[email protected], State University of New York (SUNY), School of Management, 234 Jacobs Management Center, Buffalo, NY 14260.
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Abstract

The Securities and Exchange Commission (SEC) adopted Rule 605 (formerly Rule 11Ac1–5) on November 15, 2000. The Rule requires market centers to make monthly public disclosure of execution quality. The Rule is intended to achieve a more competitive and efficient national market system by increasing the visibility of execution quality. The effective and quoted spreads for our study sample of NYSE, AMEX, and NASDAQ stocks declined significantly after implementation of the Rule. The decline cannot be attributed to a secular trend in spreads, concurrent changes in stock attributes, or the effect of decimal pricing. Although the quoted depth of NYSE stocks also declined, overall market quality is higher after implementation of the Rule. Based on these results, we conclude that the SEC's goal to improve execution quality through more transparent markets has been achieved.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007 , pp. 657 - 682
Copyright
Copyright © School of Business Administration, University of Washington 2007

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