Get access

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

Authors

  • Michael J. Barclay,

    1. University of Rochester
    Search for more papers by this author
  • William G. Christie,

    1. Vanderbilt University
    Search for more papers by this author
  • Jeffrey H. Harris,

    1. University of Notre Dame
    Search for more papers by this author
  • Eugene Kandel,

    1. Hebrew University
    Search for more papers by this author
  • Paul H. Schultz

    1. University of Notre Dame
    Search for more papers by this author
    • Barclay is at the University of Rochester. Christie is at Vanderbilt University. Harris and Schultz are at the University of Notre Dame, although the work was completed while Schultz was at Ohio State University. Kandel is at Hebrew University. The authors thank Tim McCormick of the National Association of Securities Dealers for providing the data and offering his expert advice. We also thank seminar participants at Emory University, the University of Georgia, the University of Rochester, the Securities and Exchange Commission, and the 1998 International Conference on Competition for Order Flow for their helpful suggestions. We also received helpful comments from George Benston, Robert Comment, Shane Corwin, Marc Lipson, René Stulz, Hans Stoll, Sunil Wahal, and an anonymous referee. Christie acknowledges the financial support of the Dean's Fund for Faculty Research at the Owen Graduate School of Management and the Financial Markets Research Center at Vanderbilt University. Harris and Schultz acknowledge financial support from the Dice Center for Financial Research at Ohio State University. Barclay and Kandel thank the Bradley Center at the University of Rochester for financial support. Barclay and Schultz served as consultants to the Plaintiffs IN RE: Nasdaq Market Maker Antitrust Litigation. However, these parties did not fund this paper in whole or in part. All errors are the joint property of the authors.

Abstract

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality.

Get access to the full text of this article

Ancillary