Abstract
Market professionals and regulators have been concerned by locked/crossed quotes (negative quoted spreads) for years. To ease the concerns that locked/crossed quotes may cause confusion or instability in financial markets and to promote market efficiency, the Securities and Exchange Commission implemented rules that ban locked/crossed quotes. We consider a competitive financial market that does not contain the factors considered by market professionals and regulators consider as the origins of locked/crossed quotes. We find that if there are at least three types of traders in this financial market, locked/crossed quotes can arise naturally under efficient pricing. These locked/crossed quotes reflect information transmitted in financial markets, facilitating price discovery. Hence, regulations banning locked/crossed quotes are inappropriate, as these regulations may harm the efficiency of price discovery.
| Original language | English |
|---|---|
| Article number | 1384524 |
| Journal | Cogent Economics and Finance |
| Volume | 5 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Jan 2017 |
| Externally published | Yes |
Free Keywords
- adverse selection
- behavioral heterogeneity
- locked/crossed quotes
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
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