We would like to thank Kee Chung, Roger Huang, Tim McCormick, Robert Faff (the editor) and an anonymous reviewers for their comments and valuable suggestions. We are responsible for all remaining errors.
Can quote competition reduce preferenced trading? A reexamination of the SEC’s 1997 order handling rules
Article first published online: 7 JUL 2012
© 2012 The Authors. Accounting and Finance © 2012 AFAANZ
Accounting & Finance
Volume 53, Issue 1, pages 243–264, March 2013
How to Cite
Rhee, S. G. and Tang, N. (2013), Can quote competition reduce preferenced trading? A reexamination of the SEC’s 1997 order handling rules. Accounting & Finance, 53: 243–264. doi: 10.1111/j.1467-629X.2012.00494.x
- Issue published online: 15 MAR 2013
- Article first published online: 7 JUL 2012
- Received 27 October 2010; accepted 6 October 2011 by Robert Faff (Editor).
- Preferenced trading;
- Quote competitiveness;
- Order flow competition;
- Order handling rules;
- Market reforms
In 1997, the SEC implemented the new order handling rules (OHRs) on the NASDAQ. We observe that some uncompetitive positions gained market share without improving quote competitiveness after the implementation of the OHRs. Also observed is a significant decline in the sensitivity of trading volume to quote competitiveness, indicating lower incentive for NASDAQ dealers to engage in quote competition in the post-OHR regime. We find that positions that gained trading volume without improving quote competitiveness were less competitive and were more closely associated with stocks showing low information asymmetry, which suggests that preferenced trading might be responsible for the decline in the trading volume sensitivity. Examining entries and exits around the periods of adopting OHRs, we observe net entry of uncompetitive positions and net exit of competitive positions, which indicates that preferenced trading crowded out quote competition subsequent to the OHRs. Our findings suggest that forcing intense quote competition alone produced an unwanted effect that preferencing emerged as a more attractive alternative to quote competition.