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Third Market Reforms: The Overlooked Goal of the SEC's Order Handling Rules

Published online by Cambridge University Press:  06 April 2009

Elizabeth R. Odders-White
Elizabeth R. Odders-White
Affiliation:
ewhite@bus.wisc.edu, University of Wisconsin-Madison, School of Business, Department of Finance, 975 University Avenue, Madison, WI 53706.
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Abstract

In 1997, the Securities and Exchange Commission enacted significant reforms in U.S. markets. Several studies document that the new order handling rules increased competition for Nasdaq stocks, but the reforms were designed with an additional goal in mind—to increase quote competition for the trading of NYSE-listed securities on Nasdaq (i.e., third market trading). An evaluation of the reforms in the third market indicates that they did not achieve this objective. Instead, both quote quality and quoting frequency were diminished, due primarily to elimination of the excess spread rule. This suggests that more significant changes are needed to increase inter-exchange competition.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 2 , June 2004 , pp. 277 - 304
Copyright
Copyright © School of Business Administration, University of Washington 2004

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