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Unfiltered Market Access and Liquidity: Evidence from the SEC Rule 15c3-5

Bidisha Chakrabarty (), Pankaj K. Jain (), Andriy Shkilko () and Konstantin Sokolov ()
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Bidisha Chakrabarty: Saint Louis University, St. Louis, Missouri 63108
Pankaj K. Jain: University of Memphis, Memphis, Tennessee 38152
Andriy Shkilko: Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada; University of Sydney, Darlington, New South Wales 2006, Australia
Konstantin Sokolov: University of Memphis, Memphis, Tennessee 38152

Management Science, 2021, vol. 67, issue 2, 1183-1198

Abstract: In November 2011, the U.S. Securities and Exchange Commission implemented the final provision of Rule 15c3-5 curbing unfiltered market access. The provision mandated that brokers verify their clients’ order flow for compliance with credit and capital thresholds before routing to market centers. We find that the new checks introduce latency to order flow and force some latency-sensitive strategies out of the market. As a result, liquidity providers are better able to revise their quotes in response to new information, adverse selection declines, and liquidity improves. Consistent with the notion that the market for liquidity provision is competitive, our results show that the benefit of lower adverse selection is transferred entirely to liquidity demanders in the form of lower trading costs. This paper was accepted by Karl Diether, finance.

Keywords: liquidity; unfiltered market access; picking off risk; latency-sensitive trading (search for similar items in EconPapers)
Date: 2021
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