Competition among markets: The repeal of Rule 390

Tai Kong Kam, Venkatesh Panchapagesan, Daniel G. Weaver

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


The New York Stock Exchange repealed its Rule 390 on May 8, 2000. The rule disallowed exchange members from trading stocks listed prior to April 26, 1979 outside of an exchange. We examine the implications of the rule's repeal on the competition for order flow as well as on measures of market quality such as spreads, depth and price improvement for stocks impacted by the rule. We use a second sample of stocks not subject to Rule 390 (Rule 19c-3 stocks) to control for market wide trends. We have three important findings: (1) Quoted spreads decrease by about 18% for Rule 390 stocks, three times more than the reduction for Rule 19c-3 stocks; (2) Effective spreads do not change; and (3) The NYSE lost little market share, even in smaller trades that were supposed to migrate, following the repeal. Our results indicate a paradigm shift in the way the NYSE specialists make a market. Prior to the repeal, the specialists set wider quotes but provided extensive price improvement. Following the repeal, the specialists set tighter quotes with lesser price improvement possibilities. We believe that this shift is a strategic response by the specialists to retain market share, not by improving market quality but by making order flow internalization and payment for order flow less profitable. As a result, competition improves market quality - but not in the way we would generally expect.

Original languageEnglish (US)
Pages (from-to)1711-1736
Number of pages26
JournalJournal of Banking and Finance
Issue number9
StatePublished - Sep 1 2003
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


  • Intermarket competition
  • NYSE Rule 390


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