The paper benefited greatly from the comments and suggestions of an anonymous referee and Bill Christie (editor). The authors thank Benjamin Blau, Joon Chae, Jae M. Chung, Bong-Chan Kho, Beom-Sik Jang, Dongcheol Kim, Jung-Wook Kim, Kuan-Hui Lee, Mingsheng Li, Thomas McInish, Carl Shen, Matthew Spiegel, James Upson, Hao Zhang, Xin Zhao, Lingyin Zhu, colleagues at SUNY-Buffalo and Kansas State University, session participants at the 2010 Financial Management Association Conference, and seminar participants at Seoul National University and the Korea University Business School for valuable discussion, comments, and suggestions. The usual disclaimer applies.
Regulation NMS and Market Quality
Version of Record online: 24 APR 2012
© 2012 Financial Management Association International.
Volume 41, Issue 2, pages 285–317, Summer 2012
How to Cite
Chung, K. H. and Chuwonganant, C. (2012), Regulation NMS and Market Quality. Financial Management, 41: 285–317. doi: 10.1111/j.1755-053X.2012.01184.x
- Issue online: 6 JUN 2012
- Version of Record online: 24 APR 2012
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.