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Effect of the Actual Size Rule Under Market Stress

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Author Info
David Porter ()
Yusif Simaan ()
Daniel Weaver ()
David Whitcomb ()
Abstract

We examine the introduction of the Actual Size Rule (ASR) on Nasdaq during a control period and a period of market stress. We find that market makers in both ASR and Non-ASR stocks reduce quotation sizes and widen spreads when under stress but the reduction of quotation size and increase in spread width are significantly larger for ASR stocks. We also examine October 27, when the market was under the most severe stress. We find ASR and Non-ASR stocks have similar reductions in time-weighted quotation ask size when compared with the control sample but ASR bid sizes are about 10% smaller than Non-ASR bid sizes. Our findings imply that the ASR rule may significantly reduce market quality under times of market stress. Copyright Springer Science + Business Media, Inc. 2006

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File URL: http://hdl.handle.net/10.1007/s11156-006-7211-2
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 26 (2006)
Issue (Month): 2 (March)
Pages: 87-103
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Handle: RePEc:kap:rqfnac:v:26:y:2006:i:2:p:87-103

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Related research
Keywords: NASDAQ; actual size rule; market stress;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Harris, Lawrence, 1989. "A Day-End Transaction Price Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 29-45, March. [Downloadable!]
  2. Odders-White, Elizabeth R., 2004. "Third Market Reforms: The Overlooked Goal of the SEC's Order Handling Rules," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 277-304, June. [Downloadable!]
  3. Liu, Yu-Jane, 1997. "Periodic market closure and order imbalances," Global Finance Journal, Elsevier, vol. 8(1), pages 95-111. [Downloadable!] (restricted)
  4. Yusif Simaan & Daniel G. Weaver & David K. Whitcomb, 2003. "Market Maker Quotation Behavior and Pretrade Transparency," Journal of Finance, American Finance Association, vol. 58(3), pages 1247-1268, 06. [Downloadable!] (restricted)
  5. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, 06. [Downloadable!] (restricted)
  6. McInish, Thomas H & Van Ness, Bonnie F & Van Ness, Robert A, 1998. "The Effect of the SEC's Order-Handling Rules on NASDAQ," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 21(3), pages 247-54, Fall.
  7. Michael J. Barclay & William G. Christie & Jeffrey H. Harris & Eugene Kandel & Paul H. Schultz, 1999. "Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks," Journal of Finance, American Finance Association, vol. 54(1), pages 1-34, 02. [Downloadable!] (restricted)
  8. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August. [Downloadable!] (restricted)
  9. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 3-40. [Downloadable!] (restricted)
  10. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September. [Downloadable!] (restricted)
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