Regulation NMS and Market Quality |
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| Authors: | Kee H Chung Chairat Chuwonganant |
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| Institution: | Kee H. Chung is the Louis M. Jacobs Professor of Financial Planning and Control in the School of Management at the State University of New York (SUNY) at Buffalo in Buffalo, NY. Chairat Chuwonganant is an Associate Professor of Finance in the College of Business Administration at Kansas State University in Manhattan, KS. |
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| Abstract: | We show that both the quoted and effective spreads increased, the quoted depth decreased, and the market quality index decreased after the implementation of Regulation National Market System (NMS) (Reg NMS). We also find an increase in the price impact of trades and the dispersion of the pricing error after Reg NMS. The order execution speed is slower, the order fill rate is lower, and the order cancellation rate is higher for most trades after Reg NMS. Hence, contrary to the Securities and Exchange Commission's belief, Reg NMS has proven to be detrimental to most traders. NASDAQ provided faster and more reliable executions than the NYSE/AMEX, and NASDAQ gained market shares from the NYSE/AMEX and other trading venues after Reg NMS. |
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