The Revocation of Rule 390 - a First Look
29 Pages Posted: 8 Jan 2001
Date Written: December 7, 2000
The New York Stock Exchange repealed its Rule 390 on May 8, 2000. The rule disallowed exchange members from trading stocks listed prior to April 26, 1979 outside of an exchange. We examine in this paper some of the implications of the rule's repeal. In particular, we examine changes in market quality such as spreads, depth, and price improvement. We find that quoted spreads decreased by 16 percent on average, while effective spreads declined by six percent. Moreover, quoted depth at the NYSE increased by five percent, while fewer trades were price improved. Our results suggest that the NYSE specialists improved liquidity following the repeal to remain competitive. In fact, we find that the NYSE increased its market share, especially in smaller trades that were expected to migrate following the repeal.
Keywords: Microstructure, competition, market quality, New York Stock Exchange
JEL Classification: G15, G18, G19
Suggested Citation: Suggested Citation