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Fragmentation versus Consolidation of Securities Trading: Evidence from the Operation of Rule 19c-3

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  • Davis, Jeffry L
  • Lightfoot, Lois E

Abstract

Stock exchanges defend their rules requiring members to trade listed stocks on an exchange floor as a means of achieving consolidation of trading, which, it is argued, minimizes trading costs to investors. By virtue of the Securities and Exchange Commission's Rule 19c-3, however, these exchange rules cannot apply to stocks newly listed after April 26, 1979. The objective of the Securities and Exchange Commission rule was to end what was viewed as restraint of desirable competition that would more than compensate for any cost saving resulting from consolidation. By comparing the cost of trading (measured by bid-ask spreads and returns variance) for the two distinct groups of stocks--those listed before April 26, 1979, and those listed after- -we test these competing views. We find that Rule 19c-3 has not caused any reduction in spreads but may have caused an increase and has had no effect on returns variance. Copyright 1998 by the University of Chicago.

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  • Davis, Jeffry L & Lightfoot, Lois E, 1998. "Fragmentation versus Consolidation of Securities Trading: Evidence from the Operation of Rule 19c-3," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 209-238, April.
    • Handle: RePEc:ucp:jlawec:v:41:y:1998:i:1:p:209-38
    DOI: 10.1086/467389
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    References listed on IDEAS

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    6. Cohen, Kalman J & Conroy, Robert M, 1990. "An Empirical Study of the Effect of Rule 19c-3," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 277-305, April.
    7. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
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    Cited by:

    1. Tse, Yiuman & Xiang, Ju, 2005. "Market quality and price discovery: Introduction of the E-mini energy futures," Global Finance Journal, Elsevier, vol. 16(2), pages 164-179, December.
    2. Boehmer, Beatrice & Boehmer, Ekkehart, 2003. "Trading your neighbor's ETFs: Competition or fragmentation?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1667-1703, September.
    3. Kam, Tai-Kong & Panchapagesan, Venkatesh & Weaver, Daniel G., 2003. "Competition among markets: The repeal of Rule 390," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1711-1736, September.

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