Information Disclosure and Market Quality: The Effect of Sec Rule 605 on Trading Costs

44 Pages Posted: 27 Jan 2006

See all articles by Xin Zhao

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Kee H. Chung

State University of New York at Buffalo - School of Management

Abstract

The Securities and Exchange Commission (SEC) adopted Rule 605 (formerly Rule 11Ac1-5) on November 15, 2000. The Rule requires market centers to make monthly public disclosure of execution quality. The Rule is intended to achieve a more competitive and efficient national market system by increasing the visibility of execution quality. The effective and quoted spreads for our study sample of NYSE, AMEX, and NASDAQ stocks declined significantly after implementation of the Rule. The decline cannot be attributed to a secular trend in spreads, concurrent changes in stock attributes, or the effect of decimal pricing. Although the quoted depth of NYSE stocks also declined, overall market quality is higher after implementation of the Rule. Based on these results, we conclude that the SEC's goal to improve execution quality through more transparent markets has been achieved.

Keywords: Execution costs, Market quality, Information disclosure, Market makers, Quote competition

JEL Classification: G18, G19

Suggested Citation

Zhao, Xin Jessica and Chung, Kee H., Information Disclosure and Market Quality: The Effect of Sec Rule 605 on Trading Costs. Available at SSRN: https://ssrn.com/abstract=878351 or http://dx.doi.org/10.2139/ssrn.878351

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

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