The Impact of Order Protection Rule on Market Liquidity and Price Discovery

44 Pages Posted: 3 Dec 2018

See all articles by Yimeng Yu

Yimeng Yu

Macquarie University; Capital Markets CRC Limited (CMCRC)

Yiping Lin

Capital Markets CRC Limited (CMCRC)

Shan Ji

Capital Markets CRC

Date Written: November 8, 2018

Abstract

This paper examines the impact of the Order Protection Rule on market liquidity and the efficiency of price discovery in the U.S. and Canadian markets. Overall, we find increased trading activities due to reduced transaction costs. In the U.S. markets, using the difference in differences methodology, we find a more efficient price discovery process, and the increased liquidity mainly happens to lit markets. In the Canadian markets, we find the significant improvement in quoted depth and percentage time at the national best bid and offer in small trading venues. Our findings are contrary to previous studies and shed light on potential causes of the variation.

Keywords: Order Protection Rule, Reg NMS, Liquidity, Price Discovery

JEL Classification: G12, G14

Suggested Citation

Yu, Yimeng and Lin, Yiping and Ji, Shan, The Impact of Order Protection Rule on Market Liquidity and Price Discovery (November 8, 2018). Available at SSRN: https://ssrn.com/abstract=3280781 or http://dx.doi.org/10.2139/ssrn.3280781

Yimeng Yu (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Yiping Lin

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Shan Ji

Capital Markets CRC ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia
+61280884237 (Phone)

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