Unfiltered Market Access and Liquidity: Evidence from the SEC Rule 15c3-5

Western Finance Association 2014

European Finance Association 2015

28th Australasian Finance and Banking Conference

44 Pages Posted: 21 Sep 2013 Last revised: 16 Jan 2018

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: May 16, 2014

Abstract

In November 2011, the SEC implemented the final provision of Rule 15c3-5 curbing unfiltered market access. The provision mandated that brokers verify their clients’ order flow for compliance with credit and capital thresholds before routing to market centers. We find that the new checks introduce latency to order flow and force some latency-sensitive strategies out of the market. As a result, liquidity providers are better able to revise their quotes in response to new information, adverse selection declines and liquidity improves. Consistent with the notion that the market for liquidity provision is competitive, our results show that the benefit of lower adverse selection is transferred entirely to liquidity demanders in the form of lower trading costs. We test for but do not find evidence for more direct effects such as counterparty risk reduction or binding effects of capital limits.

Keywords: Liquidity; Unfiltered market access; Picking off risk; Latency-sensitive trading

JEL Classification: G10, G14

Suggested Citation

Chakrabarty, Bidisha and Jain, Pankaj K. and Shkilko, Andriy and Sokolov, Konstantin, Unfiltered Market Access and Liquidity: Evidence from the SEC Rule 15c3-5 (May 16, 2014). Western Finance Association 2014; 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2328231 or http://dx.doi.org/10.2139/ssrn.2328231

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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