The importance of firm quotes and rapid executions: Evidence from the January 1994 SOES rules changes

Nasdaq's Small Order Execution System (SOES) allows orders to be submitted by computer, thereby assuring rapid execution at quoted prices. We examine trading in the 20 largest Nasdaq stocks around the time of a rule change that reduced the largest SOES trades from 1000 to 500 shares. We show that SOES trades contain information about short-term price movements and that SOES trading declined dramatically with the rule change. However, quoted and effective spreads were unaffected by the rule change.