Chapter 17 THE 1997 NASDAQ TRADING RULES. Abstract Several important trading rules were introduced in NASDAQ in 1997. The trading reforms have significantly reduced bid–ask spreads on NASDAQ. This decrease is due to a decrease in market-making costs and=or an increase in market competition for order flows. | Chapter 17 THE 1997 NASDAQ TRADING RULES YAN HE Indiana University Southeast USA Abstract Several important trading rules were introduced in NASDAQ in 1997. The trading reforms have significantly reduced bid-ask spreads on NASDAQ. This decrease is due to a decrease in market-making costs and or an increase in market competition for order flows. In addition in the post-reform period the spread difference between NASDAQ and the NYSE becomes insignificant with the effect of informed trading costs controlled. Keywords NASDAQ trading rules reforms bidask spread SEC order handling rules the sixteenths minimum increment rule the actual size rule NYSE informed trading costs SEC The National Association of Securities Dealers NASD was established in 1939. Its primary role was to regulate the conduct of the over-the-counter OTC segment of the securities industry. In the middle of 1960s the NASD developed an electronic quote dissemination system and in 1971 the system began formal operation as the National Association of Securities Dealers Automated Quotations NASDAQ system. By the mid-1980s timely last-sale price and volume information were made available on the terminals. Through the late 1980s and the early 1990s more functions were added to the system. For instance the Small Order Execution System SOES was introduced in 1988 and the Electronic Communi cation Networks ECN was introduced in the 1990s. Services provided by the NASDAQ network include quote dissemination order routing automatic order execution trade reporting last sale and other general market information. NASDAQ is a dealer market and it is mainly quote driven. On NASDAQ the bid-ask quotes of competing dealers are electronically disseminated to brokers offices and the brokers send the customer order flow to the dealers who have the best quotes. In comparison the New York Stock Exchange NYSE is an auction market and it is mainly order driven. Several important trading rules were introduced in NASDAQ in 1997 .
