Regulation NMS and Market Quality
Kee H. Chung
State University of New York at Buffalo - School of Management
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, G18Accepted Paper Series
Date posted: November 15, 2010 ; Last revised: September 26, 2011
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