Workshop Series: Hui Zheng
This paper examines the impact of trading by markets partially exempt from National Market System ("NMS") requirements on equity market quality. NMS and non-NMS trading venues differ in their regulatory structure in a number of dimensions most notably in whether they must provide fair-access and pre-trade transparency and restrict sub-penny trading increments. These different features make it possible for non-NMS venues to differentiate themselves and thereby attract orders. We show that non-NMS venues are able to segregate order flow based on asymmetric information risk, which results in their transactions being less informed and contributing less to price discovery on the consolidated market. Our results reveal that the effects of non-NMS order segmentation are damaging to overall market quality. Higher levels of non-NMS trading are associated with higher transaction costs for both NMS and non-NMS venues and with lower aggregate price efficiency after controlling for market information asymmetry. The execution of large transactions on non-NMS venues, however, does not harm market quality.
Dr. Hui Zheng holds a PhD in Finance from the University of Sydney. His research specialization is security market microstructure, algorithmic and high frequency trading, corporate finance and real estate evaluation. He has published in internationally refereed journals including Journal of Banking & Finance, Journal of Futures Markets and The Financial Review. He has been focusing his research on the latest development of financial markets and practice. Over the past 10 years he has conducted research in association with the Securities Industry Research Centre of Asia-Pacific, Credit Suisse (Hong Kong), the Sydney Futures Exchange, the Capital Market Cooperative Research Centre and several private investment and security services companies. Dr Zheng has also worked with the Shanghai Stock Exchange examining the security market structure in China with respect of the roles and relationships between the exchanges, government supervision bodies, brokers, and retail and institutional investors, as well as the design of real-time market surveillance in China. More recently Dr Zheng has held visiting research positions at George Mason University and NASDAQ OMX Group. His current research interests reside on issues related to market fragmentation, dark liquidity and high frequency trading. Dr. Zheng has taught a variety of subjects at both undergraduate and postgraduate levels, including corporate finance, portfolio and investment management and trading and dealing in securities markets. In particular he has introduced an on-line trading simulation system to his classes that allows students to practice while learning in real historical trading scenarios.