The relative merits of dealer versus auction markets have been a subject of significant
and sometimes contentious debate. On January 20, 1997, the Securities and Exchange
Commission began implementing reforms that would permit the public to compete directly
with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes
placed by Nasdaq dealers in private 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
spreads fell dramatically without adversely affecting market quality.