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 Securities and Exchange Commission's Rule 19c‐3, however, these exchange rules cannot apply to stocks newly listed after April 26, 1979. The objective of the Securities and Exchange Commission 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 two distinct groups of stocks—those listed before April 26, 1979, and those listed after—we test these competing views. We find 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.