Integrity of Price Discovery: Perspective of Exchanges
We listened earlier to Professor Schwartz talking about price discovery and the noise associated with this phenomena. In his presentation, Bob cleverly probed our market structure for the changes that have potentially led to a degradation in market quality. An academic paper about this same issue has taken a slightly different tack by looking at quote activity. In particular, it looked at quote activity in the wake of the market access rule that went into effect in 2011 in response to the Flash Crash, a rule which basically banned naked market access. I want to talk briefly about the findings and ask Frank Hatheway, as an academic, to respond. The paper found that quoting activity went down substantially but that market quality improved at the same time with the rate of cost going down by 10%. This suggests that there may be some elements in our market structure today that are somehow leading to less market quality. Frank, would you lead us off?