Competition and Fragmentation in the Equity Markets: The Effect of Regulation Nms
18 Pages Posted: 27 Jan 2007
Date Written: Janaury 22, 2007
The 1974 Amendments to the Securities Exchange Act of 1934 set forth the goal of establishing a National Market System (NMS) in which all equity trades would be integrated into a common computerized trading system. The paper argues that such a system cannot serve the needs of all investorslarge or small, informed or uninformed. The recently approved Regulation NMS is an attempt to impose such a common trading system onto the equity market. Large institutions with their resources will find ways to evade it and are already fragmenting the market with "dark pools" of liquidity. This Regulation will certainly result in unintended consequences, to the detriment of the US equity market.
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