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Another Day, Another Collar: An Evaluation of the Effects of NYSE Rule 80A on Trading Costs and Intermarket Arbitrage
by James Overdahl and Henry McMillan
OCC Working Paper 97-8, MAY 1997.
Abstract: In 1990, the NYSE amended its Rule 80A to restrict stock index arbitrage on days of large price movements. We design empirical tests to evaluate the impact of Rule 80A on trading costs and inter-market arbitrage. We find that Rule 80A significantly curtails -- or "collars" -- index arbitrage activity. Despite the significant curtailment of index arbitrage activity, the cash and futures markets remain linked. Pricing discrepancies between the markets are simply eliminated less quickly. Our results are consistent with the hypothesis that information is conveyed from one market to the other by means other than formal arbitrage. We also find that trading costs in the stock market, as measured by the average bid-ask spread for S&P 500 stocks, do not change following the triggering of Rule 80A, in spite of the binding constraint on index arbitrage volume. Overall, Rule 80A appears to have had little impact on trading costs and inter-market arbitrage despite significant curtailment of index arbitrage volume.
As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation: Overdahl and McMillan, "Another Day, Another Collar: An Evaluation of the Effects of NYSE Rule 80A on Trading Costs and Inter-market Arbitrage," Office of the Comptroller of the Currency, E&PA Working Paper 97-8, May 1997.
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