Impact of FINRA 2241

25 Pages Posted: 31 Oct 2022 Last revised: 7 Nov 2022

Date Written: November 5, 2022


I calculate six separate measures of market efficiency based on event studies using intraday data on equities and fixed income securities, and I calculate diligence, objectivity, quality, and accuracy, of analyst forecasts. The FINRA 2241 Rules (effective September and December 2015) constitute a major attempt by a U.S. self-regulatory organization (SRO) to improve market quality. Following Bhattacharya (2022), I model equations that have a) each of these objective and systematic market quality metrics as a function of exogenous factors, namely, indicator variable for post-FINRA 2241, Nasdaq listing, dispersion in investor valuations, short sales costs & constraints, and transaction costs & constraints, and endogenous market activities, namely, Kyle-Obizhaeva liquidity measure, normalized short interest, analyst coverage, institutional ownership of equity, log of market cap, and log of shares outstanding, and b) each endogenous market activity as a function of the exogenous factors and all other endogenous market activities. I use the panel nature of the data to identify appropriate instruments for the endogenous variables and for the variables that are measured with error, and I use Three Stage Least Squares and Errors in Variables to estimate this seven-equation structural model. I calculate the total impact of a factor which is the sum of the direct impact and the indirect impacts, and by using the Gaussian cumulative distribution of the Z-score of each variable (except for an indicator variable), I make the impacts comparable, this allows a systematic and objective definition of economic significance, which is different from statistical significance. Using a fixed effect for post-FINRA 2241, I find that FINRA 2241's impact on each of the above ten objective and systematic market quality metrics was economically insignificant.

Keywords: Market Efficiency; Event Studies; Analyst Forecasts; FINRA 2241

JEL Classification: G12; G14; G24; C23; C26; K22

Suggested Citation

Bhattacharya, Rajeev, Impact of FINRA 2241 (November 5, 2022). Available at SSRN: or

Rajeev Bhattacharya (Contact Author)

Washington Finance and Economics ( email )

United States


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