Liquidity and Market Makers

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Paul Davidson has made the point that liquidity is dependent on the
existence of market makers.

There is a debate raging on market structure reform, summarized in an
article in today's WSJ (Feb. 22 p.C19).
The debate centers around "the fragmentation of stock trading among a
growing number of competing exchanges , electronic systems and
standalone dealers."

Big firms oppose fragmentaion because it disperses volume and threaten
their customer orders' ability to command fair and consistent prices.
Tight contact with institutional customer order flow gives big firms an
advantage in selling other services, such as investment banking.
They propose a cetral order book with price-time priority for all
trading systems.
Retail firms such as Schwab oppose a central book in favor of a network
of multi links between systems so that it can keep its on-line
individual traders and its current "internalization" of market markers
within the firm, calim that a central book would eliminate freedom of
choice.

The exchanges are divided.
NASDAQ has been trying to create its own central book.
The NYSE, as always, tries to have its cake and eat it too. It does not
want to be forced into a central book with its competitors, but it also
fears fragmentation of its own centralized market.  Under SEC pressure,
it has agreed to drop Rule 390 which restricts big firms from sending
their orders elsewhere.
The SEC is asking for comment this week for the repeal of Rule 390.
The political issue is regulation (SEC) vs. deregulation (Senate Banking
Committee).

The SEC is soliciting inputs from all parties.
Do PKT scholars have any?

Henry C.K. Liu