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Published in: Review of Quantitative Finance and Accounting 2/2024

19-10-2023 | Original Research

Forced consolidation

Authors: Anna Pomeranets, Daniel G. Weaver

Published in: Review of Quantitative Finance and Accounting | Issue 2/2024

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Abstract

The European Union is moving closer to consolidating their equity markets as the United States did in the 1970s. In February 2023 fourteen European exchanges collaborated on a proposal to create a consolidated tape. This paper provides an empirical examination of the impact of regulator-imposed consolidation on market quality. We find that creating a consolidated system in the EU will likely improve market quality, providing a monetary offset to the cost of creating the system.

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Appendix
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Footnotes
1
See Gordon 2023.
 
2
See Amihud et al. (2002), Bennett and Wei (2006), Cohen et al. (1985), Porter and Thatcher (1998), among others.
 
3
See Stoll (2001), Fong et al. (2001) and Neal (1987).
 
4
See Weaver (2008).
 
5
The SEC first proposed the CTS in 1972 and it was partially operating in 1974 (before the passage of the Act) and fully implemented in 1976.
 
6
A few months after the pilot system was established, the Pacific Stock Exchange joined and by November 1978 the network included the New York, American, Philadelphia, Boston, Midwest and Pacific Stock Exchanges. The Cincinnati Stock Exchange finally joined in 1981 and NASDAQ in 1982.
 
7
ITS allowed specialists on one exchange floor to send orders to specialists on another exchange floor and therefore sustain the dominance of exchange floors. This was the case until the rules passed in 2000s brought about the rise of automated trading systems.
 
8
It is important to note that this event coincides with another major event, the elimination of the 25% New York State securities transaction tax (STT) surcharge. The literature on STTs predicts that volatility will decrease following a reduction in the level of the tax.
 
9
Miller, Lowell. “Is the S.E.C. Selling Wall Street Short?” The New York Times 23 April 1978.
 
10
At the time, AMEX was not part of the system and AMEX stocks were not widely traded on regional exchanges.
 
11
There are a large number of papers that examine the SOES system including Christie and Schultz (1994), Christie et al. (1994) and Kandel and Marx (1999), among others.
 
12
For example, fragmentation can occur because traders have unequal access to information. Floor traders have direct access to floor information and are able to trade on information that is inaccessible to non-floor traders. Another example is trader preferences. Large traders prefer not to display their orders because they fear front-running. Alternatively, small traders prefer to display their orders. For more discussion see Harris (1993).
 
13
The BQR does not report data on the Cincinnati Stock Exchange.
 
14
See Holden (2009) and Goyenko, Holden and Trzcinka (2009).
 
15
See Bennett and Wei (2006) as well as O’Hara and Ye (2011)
 
16
See Chen et al. (2023), Lien et al. (2019), Lien et al. (2020), and Lien and Hung (2023).
 
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Metadata
Title
Forced consolidation
Authors
Anna Pomeranets
Daniel G. Weaver
Publication date
19-10-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 2/2024
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01209-5

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