Nanex Research

Nanex ~ The Tighter Spreads Lie

We have found significant evidence that overall NBBO spreads have not decreased since the implementation of Reg NMS in March 2007. Combing through over 0.7 trillion quote and trade records, we sorted stocks into bins by NBBO spread every second of the trading day. We then plotted the results and were surprised to find no evidence of tighter spreads. What is worse, we found that the NBBO spread has become less stable since 2007 (See also Part 2  The Liquidity Illusion ~ NBBO Flutter ).

See also The Rise of the HFT Machines
The following animated GIF chronicles the NBBO spread for all U.S. Stocks from January 2007 through January 2012.
(Lower values means overall tighter spreads. Note the occurrence of spikes during the trading day. Some of these are news related, some are just algo's going wild).

Shows the percentage of stocks during each second with an NBBO spread greater than 1 to 25 cents. The percentage of stocks with NBBO spreads greater than 1 cent is plotted in dark violet. The percentage of stocks with spreads greater than 2 cents is plotted in a light violet, and so on up to the percentage of stocks with spreads greater than 25 cents which is plotted in red. Lower values equate to tighter spreads. Note the jump (meaning wider spreads) after Reg NMS was implemented (March 2007), which overall remains persistent through today. Also note the significant increase in spreads around news and other events such as the flash crash (5/6/2010) and August 2011.

X-Axis shows time of day (Eastern Time)

Nanex Research