The Quote Exception Rule: Giving High Frequency Traders an Unintended Advantage

Under the Securities and Exchange Commission (SEC) Rule 611 exchanges that have not matched a new National Best Bid and Offer (NBBO) can trade at the old NBBOfor one second. In 2008, this rule allowed fast traders to earn estimated revenues of $233 million at the expense of slow traders. Furthermore...

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Bibliographic Details
Published inFinancial management Vol. 42; no. 3; pp. 481 - 501
Main Authors McInish, Thomas H., Upson, James
Format Journal Article
LanguageEnglish
Published Blackwell Publishing Ltd 22.09.2013
Wiley Subscription Services, Inc
Financial Management Association
Subjects
Emergency protective orders
Interpretation and construction
Laws, regulations and rules
Liquidity
Market prices
Nasdaq Composite Index
Prices and rates
Pulmonary compliance
Revenue
Securities industry
Securities law
Securities trading
Stock exchanges
Trade
Trade protections
Trade volume
United States
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Summary:Under the Securities and Exchange Commission (SEC) Rule 611 exchanges that have not matched a new National Best Bid and Offer (NBBO) can trade at the old NBBOfor one second. In 2008, this rule allowed fast traders to earn estimated revenues of $233 million at the expense of slow traders. Furthermore, we find that when the NYSE decreased latency by 600 milliseconds on March 10, 2008, execution quality improved markedly for fast liquidity demander s, but improved only minimally for slow liquidity demanders. However, we find a decrease in volume executed at adverse prices under the faster market conditions.
Bibliography:ark:/67375/WNG-BCPDKR1K-C
istex:28788D80FDC4F35AE888626AF1A090659FFA781C
ArticleID:FIMA12017
The authors wish to thank an anonymous referee, Sie Ting Lau, Bohui Zhang, William T. Smith, Larry Harris, Joel Hasbrouck, Gideon Saar, Maureen O'Hara, and Jonathan Brogaard for helpful comments. We received useful comments from the participants at a Securities and Exchange Commission seminar in September 2011 and the NBER market microstructure conference in December 2011. We also thank Leslie Boni, Marc Lipson, Michael Goldstein, and other seminar participants at the 2012 FMA. Any errors remain our own
Thomas H. McInish is a Professor and Wunderlich Chair of Finance in the Department of Finance, Insurance and Real Estate at Fogelman College of Business and Economics at the University of Memphis in Memphis, TN. James Upson is an Assistant Professor of Finance in the College of Business at the University of Texas at El Paso in El Paso, TX
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ISSN:0046-3892
1755-053X
DOI:10.1111/fima.12017