Securities Markets in a Competitive Age An Empirical Analysis of Regulation NMS by

The United States securities markets have served as the subject of a continuing debate regarding the structure most beneficial to local market participants. A consolidated market structure reduces transactions cost by increasing liquidity in the shares of a security. Conversely, fragmentation creates a system wherein competition flourishes and innovation is fostered. Balancing these opposing viewpoints, the United States Securities and Exchange Commission, under mandate from Congress, has attempted to create a segmented market structure void of monopolistic inefficiencies, but consolidated in information sharing. The resulting National Market System began with the Securities Acts Amendments of 1975 and culminated in the passing of Regulation NMS in 2005. In this paper, I assess the degree to which the goals of a National Market System – reduced transaction costs and increased liquidity – are met with the passing of Regulation NMS. I first chronicle the debate surrounding NMS and the regulatory steps leading to Regulation NMS. I then use empirical analysis on the changes in key measures of execution costs and liquidity following the full implementation of Regulation NMS on August 31, 2006. Through this analysis I find that market quality has indeed increased as a result of Regulation NMS. I would like to thank Professor Joel Hasbrouck for his unyielding support and guidance throughout my personal and academic investigation of the topic of securities markets. I would also like to thank Professor Marti Subrahmanyam and Advisor Jessie Rosenzweig for organizing and facilitating such a wonderful program.