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Regulation NMS and Market Quality

Kee H. Chung

State University of New York at Buffalo - School of Management

Chairat Chuwonganant

Kansas State University - Department of Finance

September 26, 2011

Financial Management, Forthcoming

We show that both the quoted and effective spreads increased, the quoted depth decreased, and the market quality index decreased after the implementation of Regulation NMS (Reg NMS). We also find an increase in the price impact of trades and the dispersion of the pricing error after Reg NMS. The order execution speed is slower, the order fill rate is lower, and the order cancellation rate is higher for most trades after Reg NMS. Hence, contrary to the SEC’s belief, Reg NMS has proven to be detrimental to most traders. NASDAQ provided faster and more reliable executions than the NYSE/AMEX, and NASDAQ gained market shares from the NYSE/AMEX and other trading venues after Reg NMS.

Number of Pages in PDF File: 55

Keywords: regulation NMS, spreads, depths, market quality index, trading costs, price discovery, execution speed, execution probability, price impact, price improvement, return volatility, market share

JEL Classification: G14, G18

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Date posted: November 15, 2010 ; Last revised: September 26, 2011

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat, Regulation NMS and Market Quality (September 26, 2011). Financial Management, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1455969

Contact Information

Kee H. Chung (Contact Author)
State University of New York at Buffalo - School of Management ( email )
Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)
HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html
Chairat Chuwonganant
Kansas State University - Department of Finance ( email )
Manhattan, KS 66506
United States
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