Hostname: page-component-848d4c4894-wg55d Total loading time: 0 Render date: 2024-05-16T17:04:38.615Z Has data issue: false hasContentIssue false
  • English
  • Français

Information Disclosure and Market Quality: The Effect of SEC Rule 605 on Trading Costs

Published online by Cambridge University Press:  06 April 2009

Xin Zhao  and
Kee H. Chung
Xin Zhao
Affiliation:
xuz12@psu.edu, Pennsylvania State University at Erie, Behrend College, 5101 Station Rd, Erie, PA 16563
Kee H. Chung
Affiliation:
keechung@buffalo.edu, State University of New York (SUNY), School of Management, 234 Jacobs Management Center, Buffalo, NY 14260.
Get access Rights & Permissions [Opens in a new window]

Abstract

The Securities and Exchange Commission (SEC) adopted Rule 605 (formerly Rule 11Ac1–5) on November 15, 2000. The Rule requires market centers to make monthly public disclosure of execution quality. The Rule is intended to achieve a more competitive and efficient national market system by increasing the visibility of execution quality. The effective and quoted spreads for our study sample of NYSE, AMEX, and NASDAQ stocks declined significantly after implementation of the Rule. The decline cannot be attributed to a secular trend in spreads, concurrent changes in stock attributes, or the effect of decimal pricing. Although the quoted depth of NYSE stocks also declined, overall market quality is higher after implementation of the Rule. Based on these results, we conclude that the SEC's goal to improve execution quality through more transparent markets has been achieved.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007 , pp. 657 - 682
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bessembinder, H. “Issues in Assessing Trade Execution Costs.” Journal of Financial Markets, 6 (2003a), 233–257.CrossRefGoogle Scholar
Bessembinder, H. “Trade Execution Costs and Market Quality after Decimalization.” Journal of Financial and Quantitative Analysis, 38 (2003b), 747–777.CrossRefGoogle Scholar
Bessembinder, H. “Selection Biases and Cross-Market Trading Cost Comparisons.” Working Paper, University of Utah (2003c).Google Scholar
Bessembinder, H.; Maxwell, W.; and Venkataraman, K.. “Market Transparency, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds.” Journal of Financial Economics, 82 (2006), 251–288.CrossRefGoogle Scholar
Blume, M., and Goldstein, M.. “Quotes, Order Flow, and Price Discovery.” ournal of Finance, 52 (1997), 221–244.CrossRefGoogle Scholar
Boehmer, E. “Dimensions of Execution Quality: Recent Evidence for U.S. Equity Markets.” Journal of Financial Economics, 78 (2005), 553–582.CrossRefGoogle Scholar
Boehmer, E.; Jennings, R.; and Wei, L.. “Public Disclosure and Private Decisions: The Case of Equity Market Execution Quality.” Review of Financial Studies, 20 (2007), 315–358.CrossRefGoogle Scholar
Boehmer, E.; Saar, G.; and Yu, L.. “Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE.” Journal of Finance, 60 (2005), 783–815.CrossRefGoogle Scholar
Bollen, N., and Whaley, R.. “Are ‘Teenies’ Better?” Journal of Portfolio Management, 25 (1998), 10–24.CrossRefGoogle Scholar
Chakravarty, S.; Wood, R.; and Van Ness, R.. “Decimals and Liquidity: A Study of the NYSE.” Journal of Financial Research, 27 (2004), 75–94.CrossRefGoogle Scholar
Chung, K. H.; Charoenwong, C.; and Ding, D.. “Penny Pricing and the Components of Spread and Depth Changes.” Journal of Banking and Finance, 28 (2004), 2981–3007.CrossRefGoogle Scholar
Chung, K. H.; Van Ness, B.; and Van Ness, R.. “Trading Coss and Quote Clustering on the NYSE and NASDAQ after Decimalization.” Journal of Financial Research, 27 (2004), 309–328.CrossRefGoogle Scholar
Ellis, K.; Michaely, R.; and O'Hara, M., “The Accuracy of Trade Classification Rules: Evidence from NASDAQ.” Journal of Financial and Quantitative Analysis, 35 (2000), 529–552.CrossRefGoogle Scholar
Goldstein, M., and Kavajecz, K.. “Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE.” Journal of Financial Economics, 56 (2000), 125–149.CrossRefGoogle Scholar
Harris, L. “Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes.” Review of Financial Studies, 7 (1994), 149–178.CrossRefGoogle Scholar
Harris, L. “Decimalization: A Review of the Arguments and Evidence.” Working Paper, University of Southern California (1997).Google Scholar
He, C.; Odders-White, E.; and Ready, M.. “The Impact of Preferencing on Execution Quality.” Journal of Financial Markets, 9 (2006), 246–273.CrossRefGoogle Scholar
Lee, C.; Mucklow, B.; and Ready, M.. “Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis.” Review of Financial Studies, 6 (1993), 345–374.CrossRefGoogle Scholar
Lipson, M. “Competition among Market Centers.” Working Paper, University of Georgia (2004).Google Scholar
Schultz, P. “Stock Splits, Tick Size, and Sponsorship.” Journal of Finance, 55 (2000), 429–450.CrossRefGoogle Scholar
Securities and Exchange Commission. Final Rule: Disclosure of Order Execution and Routing Practices. Securities and Exchange Commission (2000).Google Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar