شفافیت و کیفیت بازار : شواهدی از SuperMontage

In this study, we examine the effect of pre-trade transparency on market quality using data before and after the introduction of SuperMontage. Our results show that both bid–ask spreads and return volatility declined significantly after the implementation of SuperMontage. In addition, SuperMontage led to significant improvements in the SEC Rule 605 execution quality measures (e.g., faster executions and higher fill rates). Overall, our results indicate that SuperMontage improved market and execution quality on NASDAQ through greater pre-trade transparency and the integrated, more efficient quotation and trading system.

In this study we examine the effect of pre-trade transparency on liquidity and execution quality using data before and after the introduction of SuperMontage. NASDAQ launched SuperMontage on October 14, 2002 and completed its implementation on December 2, 2002. SuperMontage is a fully integrated order display and execution system for NASDAQ-listed securities. The launch of SuperMontage is a significant development in the evolution of trading NASDAQ securities. Prior to SuperMontage, NASDAQ collected and displayed the single best bid and offer (BBO) from each market participant.1 Traders did not have an access to untapped pools of liquidity below this Top-of-File Pricing. The inability to observe market participants' trading interests below a single price level deprived investors/traders of valuable information about market participants' collective willingness to trade. After the introduction of SuperMontage, market participants can continue to send NASDAQ only their best bid and best offer prices. Alternatively, they can enter multiple orders and quotes at different price levels. SuperMontage then displays the aggregate trading interest of all market participants at five price levels on a dynamic (real time) basis and additional price levels on a non-dynamic basis. The increased pre-trade transparency helps investors and market participants make better-informed trading decisions. We examine how the increased transparency associated with SuperMontage has affected the bid–ask spread, return volatility, quote aggressiveness, and measures of execution quality. Although the initial conception of SuperMontage was largely motivated by NASDAQ's desire to increase its market share through greater transparency and access to liquidity below the best price level, we conjecture that the new order display system and trading platform exert a significant impact on liquidity and execution quality. To the best of our knowledge, our study is the first comprehensive academic study of the effect of SuperMontage on market quality. We first examine differences in spreads between the pre- and post-SuperMontage periods using a large sample of NASDAQ-listed securities. Our results indicate that quoted and effective spreads declined significantly after the launch of SuperMontage. We perform a robustness test using a control sample of NYSE stocks to examine whether our results are driven by market-wide changes in spreads over time. We also check whether our results could be explained by changes in stock attributes between the pre- and post-SuperMontage periods. The results show that the reduction in quoted and effective spreads remains significant after controlling for secular trends in spreads or concurrent changes in stock attributes. Based on these results, we conclude that the reduction in spreads could largely be attributed to the effect of SuperMontage. Because SuperMontage allows market participants to submit multiple orders and quotes, the aggregate depth at each price level is likely to be greater under SuperMontage than under its predecessor SuperSOES.2 With the greater liquidity available at each price level, including that at the inside market,3 it would take more volume to move the price. These considerations suggest that return volatility is likely to decrease after the introduction of SuperMontage. However, we note that SuperMontage allows multiple orders to move through different price levels quickly in a single transaction. This feature may actually increase return volatility. Prior theoretical literature (detailed in the next section) also offers conflicting predictions as to the effect of pre-trade transparency on return volatility. Therefore, whether SuperMontage increases or decreases return volatility is an empirical question. We compare the return volatility of NASDAQ stocks before and after the implementation of SuperMontage and find that return volatility is significantly lower during the post-SuperMontage period. We examine whether the probability that market participants' quotes are at the inside market is higher when they are allowed to submit multiple quotes than when they are allowed to submit a single quote. Market participants may have a greater incentive to quote aggressively and thus be at the inside market more often (i.e., be more competitive) when they are able to see the liquidity available at multiple prices than when they see the liquidity available only at a single price. We acknowledge that the inside spread of a given stock under SuperMontage is likely to be different from its inside spread under SuperSOES. Our conjecture is that more market participants would be at the inside market in a more transparent market, irrespective of the size of the inside spread. To test this conjecture, we compare price and size aggressiveness between the pre- and post-SuperMontage periods. For each stock, we measure a market participant's price aggressiveness by the proportion of time at the inside market using the NASDAQ Trade and Quote (NASTRAQ) data. We measure a market participant's size aggressiveness by the ratio of the market participant's quoted depth to the average quoted depth of all market participants at the inside. Consistent with our conjecture, we find that both the price and size quote aggressiveness increased significantly after the implementation of SuperMontage. The quotation and execution system in the new platform is fully integrated. Under the new system, orders from different traders that need multiple executions can occur in the same trading engine. To examine whether the integrated execution system of SuperMontage improved the execution quality of NASDAQ securities, we compare the Securities and Exchange Commission (SEC) Rule 605 execution quality measures before and after the implementation of SuperMontage. The SEC adopted Rule 605 (formerly Rule 11Ac1-5) on November 15, 2000 to improve public disclosure of execution quality. Under Rule 605, market centers are required to disclose the basic information regarding execution quality for each stock on a monthly basis. We find that the introduction of SuperMontage increases execution speeds, increases fill rates, and reduces realized spreads. On the whole, our results indicate that SuperMontage improved market quality on NASDAQ through greater pre-trade transparency and the integrated, more efficient quotation and trading platform. Our study has implications beyond the NASDAQ market. Many financial markets such as foreign exchange and derivative markets have technological ability to establish sophisticated quotation and trading systems similar to SuperMontage. Clear documentation of the effects of SuperMontage on transaction costs and execution quality provides them with valuable information on the possible benefits of such systems. The paper is organized as follows. Section 2 surveys the related theoretical and empirical literature. Section 3 describes data sources and sample selection. Sections 4, 5 and 6 present empirical results. Section 7 provides a brief summary and concluding remarks.

In this study, we analyze the effects of pre-trade transparency on market quality using data surrounding the implementation of SuperMontage on NASDAQ. SuperMontage is a fully integrated order display and execution system which provides more transparent and deeper markets for NASDAQ securities than its predecessor SuperSOES. The NASDAQ market became more transparent because SuperMontage enables traders to observe aggregate buy and sell interests at five price levels not just the best price. The NASDAQ market became deeper and more liquid because SuperMontage allows market participants to submit multiple quotes and orders for the same security and creates a central trading book. Our empirical results show that both quoted and effective spreads declined significantly after the implementation of SuperMontage. We interpret this result as that SuperMontage’s transparent order display system and efficient trading platform prompted market participants to submit more aggressive quotes and orders. We also find a significant reduction in return volatility after the implementation of SuperMontage. We attribute this result to the greater aggregate depth arising from the fact that Super- Montage allows market participants to submit multiple orders and quotes. Our results also show that both price and size aggressiveness increased significantly after the implementation of SuperMontage. We interpret this result as that market participants have a greater incentive to quote aggressively and thus be at the inside market more often when they are able to see the liquidity available at multiple prices. Not surprisingly, we find that SuperMontage led to significant improvements in the Securities and Exchange Commission (SEC) Rule 605 execution quality measures. Based on these results, we conclude that SuperMontage improved market quality on NASDAQ through greater pre-trade transparency and the integrated, more efficient quotation and trading system.