Information disclosure and market quality: The effect of SEC Rule 11Ac1-5 on trading cost

The Securities and Exchange Commission adopted Rule 11Ac1-5 on November 15, 2000. The rule requires market centers to make monthly electronic disclosures of basic information regarding execution quality. The rule is intended to empower market forces with the means to achieve a more competitive and efficient national market system by increasing the visibility of execution quality. We find that the quoted, effective, and realized spreads of our sample of NYSE and AMEX stocks declined significantly after the rule implementation. The decline cannot be attributed to 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 the rule implementation because the increase in liquidity associated with narrower spreads is greater than the decrease in liquidity associated with smaller depths. JEL classification: G18; G19