Fragmentation Versus Consolidation of Securities Trading: Evidence From the Operation of Rule 19C‐3

Stock exchanges defend their rules requiring members to trade listed stocks on an exchange floor as a means of achieving consolidation of trading, which, it is argued, minimizes trading costs to investors. By virtue of the SEC's Rule 19c-3, however, these exchange rules cannot apply to stocks newly listed after April 26, 1979. The objective of the SEC rule was to end what was viewed as restraint of desirable competition that would more than compensate for any cost saving resulting from consolidation. By comparing the cost of trading (measured by bid-ask spreads and returns variance) for the 2 distinct groups of stocks - those listed before April 26, 1979, and those listed after - a study tests these competing views. The study finds that Rule 19c-3 has not caused any reduction in spreads but may have caused an increase and has had no effect on returns variance.