Theory suggests that informational frictions lead to mispricing and resource misallocation. We empirically test how an exogenous upgrade to the public quote signal impacts price informativeness. We exploit the SEC’s Rule 600(b) amendment that made the size of round-lots price-contingent, rendering smaller quotes NBBO-eligible. Using an event-study design with synthetic difference-in-differences, we find that the reform improves the quality of the public signal by reducing transitory pricing noise. Our results show how even minor enhancements in information dissemination can lead to meaningful improvements in market quality.

In U.S. public equity markets, two trading firms-Citadel Securities and Virtu Financial-help execute around 70% of all retail orders. Citadel, by itself, intermediates 25% of all U.S. stock trades. Its rival, Jane Street, reports being involved in 2% of trading across 20 countries. Buying and selling in fractions of a second, a small cohort of firms including Citadel, Jane Street and Virtu, have come to dominate the business of making markets, offering themselves as trading counterparties for others. This function is critical for market quality and continuity-so much so that, until recently, it came with its dedicated body of laws and mandates, requiring those charged with making markets to promise to defend them in times of trouble. Today, it is more informally practiced, characterized by fierce competition for each trade, while becoming concentrated in the hands of a few repeat winners.

We study how labor mobility institutions shape local market competition by exploiting the Protocol for Broker Recruiting, a voluntary agreement governing client solicitation during labor transitions in the U.S. financial advisory industry. We show that greater local penetration of Protocol-member firms intensifies market competition, an effect that remains robust when we exploit exogenous shocks to the Protocol's marginal value. This pro-competitive effect operates through the reallocation of human capital: small entrants to the Protocol experience significant growth in assets under management and employment, while large incumbents disproportionately lose high-quality advisers. Our findings underscore the role of labor mobility institutions in shaping market structure, especially in talent-intensive and increasingly concentrated industries.

This article shows that exchange-traded funds (ETFs) "sample" their indexes, systematically underweighting or omitting illiquid index stocks. As a result, arbitrage activity between the ETF and its index has heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs reduces liquidity and price efficiency and increases volatility and co-movement for liquid stocks but has no effect on illiquid stocks. Our results demonstrate that the effects of passive investing on asset markets depend on how passive funds replicate their target index.

This paper documents that European stocks are more expensive to trade than comparable U.S. stocks. Using a matched sample of European stocks and their U.S. peers from 2010 to 2024, we show that this “liquidity gap” narrowed substantially but remains economically significant. European small-cap effective spreads are more than twice those of their U.S. peers. The gap is wider for stocks with less exchange competition and lower free float. It is also wider for firms listed on smaller exchange groups and in countries with lower retail ownership. The evidence highlights liquidity as a central friction in Europe’s capital-market competitiveness.

We test competing theories of liquidity dynamics during extreme volatility spikes (EVSs). We find that liquidity providers strategically allow for price pressures and are compensated from correcting pricing errors. As a result, liquidity provision intensifies toward the end of a typical EVS. This goes counter to a widespread concern that market-making constraints cause liquidity to deteriorate as EVSs develop. The prevailing limit order book dynamics during EVSs are in line with the socially beneficial equilibrium presented in the theoretical literature. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.04104 .

Using three exogenous shocks to ex ante litigation risk, including federal judge ideology and two influential judicial precedents, we find that lower shareholder litigation risk reduces a firm's propensity to delist from the U.S. stock markets. The effect is at least partially driven by indirect costs of litigation and that being a private firm can significantly reduce the threat of litigation. Overall, the results suggest that mitigating excessive litigation costs for public firms is crucial to ensure the continued vibrancy of the U.S. stock market.

Papers published in finance and economics journals whose first authors are famous have more citations than papers whose second or third authors are famous. As a paper ages, its citation rate varies most with variation in the fame of the first author and less so with the fame of second and third authors. Author order is alphabetical, so these patterns are unrelated to underlying quality. The magnitudes we find are large; a three-author paper written by the most prolific author in economics and his two research assistants would increase, on average, its percentile rank by 30 percentage points if the prolific author was first rather than second or third. The effect is especially pronounced in three, rather than two, author papers, suggesting that burying a famous author in the “et al.” reduces citations the most. This paper was accepted by David Sraer, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.00840 .

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While algorithmic trading now dominates financial markets, some exchanges continue to use human floor traders. On March 23, 2020 the NYSE suspended floor trading because of COVID-19. Using a difference-in-differences analysis, we find that floor traders are important contributors to market quality, even in the age of algorithmic trading. The suspension of floor trading leads to higher effective and quoted spreads and larger pricing errors. Moreover, consistent with theoretical predictions about automation, the effects are strongest around the opening and closing auctions when complexity is highest. Our findings suggest that human expertise can complement algorithms in complex situations.

Practitioners allocate substantial resources to technical analysis whereas academic theories of market efficiency rule out technical trading profitability. We study this long-standing puzzle by applying a diverse set of machine learning algorithms. The results show that an investor can find profitable technical trading rules using past prices, and that this out-of-sample profitability decreases through time, showing that markets have become more efficient over time. In addition, we find that the evolutionary genetic algorithm's attitude in not shying away from erroneous predictions gives it an edge in building profitable strategies compared to the strict loss-minimization-focused machine learning algorithms.

We show that firms hold less cash when more of their shares are traded on "dark" venues. We exploit the randomized variation in dark trading generated by the trade-at rule of the Tick Size Pilot Program to establish a causal relation. The relaxation of financial constraints and improved governance are two plausible channels through which dark trading affects cash holdings. Dark trading is also associated with a higher value of cash. Overall, the findings suggest that dark trading enhances informational efficiency and reduces the precautionary demand for cash through lowering the cost of external financing and improving governance.

This paper examines the impact of Zero-Day-to-Expiration (0DTE) options trading on stock market volatility. The monthly trading volume of 0DTE options linked to indices increased from .08 million contracts in January 2011 to 34.4 million contracts in August 2023 and now accounts for 48% of the trading in index options. Using the staggered introduction of index weekly options as an instrument variable, we show that a one standard deviation increase in 0DTE options trading leads to 9.10% increase relative to the mean value of volatility, which is 15.91% of its standard deviation. Even after controlling for option market makers’ gamma hedging, we find that the overall impact on volatility remains positive and is primarily driven by speculative retail investors.

Theory suggests that dark pools may facilitate or discourage information acquisition. We find that more dark pool trading leads to greater information acquisition. We measure information acquisition using stock price dynamics around earnings announcements. To overcome endogeneity concerns, we exploit a large exogenous decrease to dark pool trading that results from the implementation of the Security and Exchange Commission’s (SEC’s) Tick Size Pilot Program. The results cannot be explained by lit venue liquidity, algorithmic trading, or informational efficiency. A battery of additional tests, such as documenting a shift in SEC EDGAR searches, supports the information acquisition interpretation.

We examine how liquidity in the equity market affects bank lending costs. An exogenous decrease in liquidity during the SEC Tick Size Pilot Program raises corporate bank borrowing costs; an effect that reverses when the program ends. We find similar results in a broad panel of firms using both retail and institutional measures of liquidity. We identify three nonmutually exclusive channels driving this effect. Liquidity increases the price informativeness, enhances external monitoring by blockholders, and weakens the holdup problem in relationship banking. Finally, consistent with our channels we show that firms obtain larger loans with fewer covenant and collateral requirements.

Regulators and theory predict that spoofing harms market quality. Using proprietary user-level identified order book data, we develop a tangible definition of spoofing. Consistent with theory, spoofing is most prevalent at intermediate levels of liquidity. Exploiting SEC Litigation Releases and lagged spoofing profitability as instruments, we test the theoretical predictions from Skrzypacz and Williams (JF, forthcoming). We find causal evidence that spoofing increases volatility and transaction costs, and decreases price efficiency. Consistent with regulatory concerns and theory, the findings indicate that spoofing harms market quality.