Hostname: page-component-7bb8b95d7b-l4ctd Total loading time: 0 Render date: 2024-10-06T22:04:24.965Z Has data issue: false hasContentIssue false
  • English
  • Français

Third Market Reforms: The Overlooked Goal of the SEC's Order Handling Rules

Published online by Cambridge University Press:  06 April 2009

Elizabeth R. Odders-White
Elizabeth R. Odders-White
Affiliation:
[email protected], University of Wisconsin-Madison, School of Business, Department of Finance, 975 University Avenue, Madison, WI 53706.
Get access Rights & Permissions [Opens in a new window]

Abstract

In 1997, the Securities and Exchange Commission enacted significant reforms in U.S. markets. Several studies document that the new order handling rules increased competition for Nasdaq stocks, but the reforms were designed with an additional goal in mind—to increase quote competition for the trading of NYSE-listed securities on Nasdaq (i.e., third market trading). An evaluation of the reforms in the third market indicates that they did not achieve this objective. Instead, both quote quality and quoting frequency were diminished, due primarily to elimination of the excess spread rule. This suggests that more significant changes are needed to increase inter-exchange competition.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 2 , June 2004 , pp. 277 - 304
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barclay, M.Christie, W.Harris, J.Kandel, E. and Schultz, P.. “The Effects of Market Reform on the Trading Costs of Nasdaq Stocks.” Journal of Finance, 54 (1999), 1–34.CrossRefGoogle Scholar
Battalio, R. “Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?” Journal of Finance, 52 (1997), 341–352.Google Scholar
Beny, L. “U.S. Secondary Stock Markets: A Survey of Current Regulatory and Structural Issues and a Reform Proposal to Enhance Competition.” Columbia Business Law Review (2002), 399–473.CrossRefGoogle Scholar
Bessembinder, H. “Trade Execution Costs on Nasdaq and the NYSE: A Post-Reform Comparison.” Journal of Financial and Quantitative Analysis, 34 (1999), 387–407.CrossRefGoogle Scholar
Bessembinder, H. “Quote-Based Competition and Trade Execution Costs in NYSE-Listed Stocks.” Journal of Financial Economics, 70 (2003), 385–422.CrossRefGoogle Scholar
Bessembinder, H., and Kaufman, H.. “A Cross-exchange Comparison of Execution Costs and Information Flow for NYSE-Listed Stocks.” Journal of Financial Economics, 46 (1997), 293–319.CrossRefGoogle Scholar
Bloomfield, R., and O'Hara, M.. “Does Order Preferencing Matter?” Journal of Financial Economics, 50 (1998), 3–37.CrossRefGoogle Scholar
Blume, M., and Goldstein, M.. “Quotes, Order Flow, and Price Discovery.” Journal of Finance, 52 (1997), 221–244.CrossRefGoogle Scholar
Bollen, N., and Whaley, R.. “Are ‘Teenies’ Better?” Journal of Portfolio Management, 25 (1998), 10–24.CrossRefGoogle Scholar
Christie, W., and Schultz, P.. “Why Do Nasdaq Dealers Avoid Odd-Eighth Quotes?” Journal of Finance, 49 (1994), 1813–1840.Google Scholar
Cohen, K., and Conroy, R.. “An Empirical Study of the Effect of Rule 19c-3.” Journal of Law and Economics, 33 (1990), 277–305.CrossRefGoogle Scholar
Davis, J., and Lightfoot, L.. “Fragmentation versus Consolidation of Securities Trading: Evidence from the Operation of Rule 19c-3.” Journal of Law and Economics, 41 (1998), 209–238.CrossRefGoogle Scholar
Doran, L. “Market-Making in the Third Market for NYSE-Listed Securities.” Financial Review, 34 (1999), 29–54.CrossRefGoogle Scholar
Dutta, P., and Madhavan, A.. “Competition and Collusion in Dealer Markets.” Journal of Finance, 52 (1997), 245–276.CrossRefGoogle Scholar
Easley, D.Kiefer, N. and O'Hara, M.. “Cream-Skimming or Profit Sharing? The Curious Role of Purchased Order Flow.” Journal of Finance, 51 (1996), 811–834.Google Scholar
Ellis, K.Michaely, R. and O'Hara, M.. “When the Underwriter is the Market Maker: An Examination of Trading in the IPO Aftermarket.” Journal of Finance, 55 (2000), 1039–1074.CrossRefGoogle Scholar
Goldstein, M., and Kavajecz, K.. “Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE.” Journal of Financial Economics, 56 (2000), 125–149.CrossRefGoogle Scholar
Harris, L., and Panchapagesan, V.. “The Information Content of the Limit Order Book: Evidence from NYSE Specialist Trading Decisions.” Working Paper, Univ. of Southern California (2002).Google Scholar
Hasbrouck, J. “One Security, Many Markets: Determining the Contributions to Price Discovery.” Journal of Finance, 50 (1995), 1175–1199.CrossRefGoogle Scholar
Jones, C., and Lipson, M.. “Sixteenths: Direct Evidence on Institutional Execution Costs.” Journal of Financial Economics, 59 (2001), 253–278.CrossRefGoogle Scholar
Kam, T.Panchapagesan, V. and Weaver, D.. “Competition Among Markets: The Repeal of Rule 390.“ Journal of Banking and Finance, 27 (2003), 1711–1736.CrossRefGoogle Scholar
Kavajecz, K. “A Specialist's Quoted Depth and the Limit Order Book.” Journal of Finance, 54 (1999), 747–771.CrossRefGoogle Scholar
Kavajecz, K., and Odders-White, E.. “An Examination of Changes in Specialists' Posted Price Schedules.” Review of Financial Studies, 14 (2001), 681–704.CrossRefGoogle Scholar
Klock, M., and McCormick, D. T.. “The Impact of Market-Maker Competition on Nasdaq Spreads.” Financial Review, 34 (1999), 55–74.CrossRefGoogle Scholar
Lee, C. “Market Integration and Price Execution for NYSE-Listed Securities.” Journal of Finance, 48 (1993), 1009–1038.Google Scholar
Lee, C.Mucklow, B. and Ready, M.. “Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis.” Review of Financial Studies, 6 (1993), 345–374.CrossRefGoogle Scholar
Stoll, H. “Market Fragmentation.” Financial Analysts Journal, 57 (2001), 16–20.CrossRefGoogle Scholar
Van Ness, B.Van Ness, R. and Chung, K.. “Spreads, Depths, and Quote Clustering on the NYSE and Nasdaq: Evidence after the 1997 SEC Rule Changes.” Financial Review, 37 (2002), 481–505.Google Scholar
Van Ness, B.Van Ness, R. and Pruitt, S.. “The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility.” Review of Quantitative Finance and Accounting, 15 (2000), 153–167.CrossRefGoogle Scholar
Weston, J. “Competition on the Nasdaq and the Impact of Recent Market Reforms.” Journal of Finance, 55 (2000), 2565–2598.CrossRefGoogle Scholar