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This paper
examines the effect of recent market reforms on the competitive structure of
the Nasdaq. Our results show that changes in inventory and information costs
cannot explain the post-reform decrease in bid-ask spreads. We interpret
this as evidence that the reforms have reduced Nasdaq dealers’ rents.
Additionally, we find that the difference between NYSE and Nasdaq spreads
have been greatly diminished with the new rules. Further, the reforms have
resulted in an exit, ceteris paribus, from the industry for market making.
Overall, our results provide strong evidence that the reforms have improved
competition on the Nasdaq
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