Effects of market reform on the trading costs and depths of Nasdaq stocks

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Sec urities and Exchange Commission began implementing reforms that would permi t the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in pri vate trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective s preads fell dramatically without adversely affecting market quality.