The Effect of the SEC's Order-Handling Rules on NASDAQ

We study the effect of the implementation of new Securities and Exchange Commission order-handling rules--the Limit Order Display Rule, the Quote Rule, and the Actual Size Rule--on NASDAQ's quoting and trading behavior. We find that the number of reported quotes increases and the bid-ask spread decreases following the implementation of the new rules. The decreased quoted depth associated with placement of individual investors' limit orders--the Limit Order Display Rule--outweighs the increased quoted depth associated with displaying institutional quotes--the Quote Rule. Further, the number of trade executions increases while the average trade size decreases. The volatility of trade-to-trade and midpoint returns decreases for the initial group of stocks subject to the rules, but not for the two subsequent groups.