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Tony: Our SBT discussions, which I've given for the past few weeks, have described the components of the market model. A number of different models are being used and adopted around the world today. The Electronic Communication Network (ECN) model sprang up and flourished for OTC stocks. Island, for instance, or Instinet represent liquidity without accountability, because you have a lot of these individuals you speak of on their Bloombergs, CQGs, pivotpoints, etc., and they're buying and selling when they get signals. That works really well when you have a critical mass, which I believe you have in a treasury bond pit or an S&P 500 pit or the Eurodollar crowd. Where it breaks down is in more obscure products, for which the market makers and traders on the floor have a quid pro quo agreement with the exchanges, and thus the CFTC and the SEC. They make markets even when the issues are illiquid issues or obscure issues, because that's their job if they're standing in the pits. Upon being asked to make a market, they have to buy or sell. They're fully accountable. |
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On the screen you may have liquidity. The people who say we don't need market makers because they'll make the market are right part of the time, but part of the time they'll be absent. In times of high volatility and in illiquid issues or more obscure issues where they don't want to play, they have a different degree of risk tolerance and they have a different sense of buffering the markets. When you have people buying and selling and have plenty of them present, you have liquidity on the screen. But when you have someone stuffed one or two times too many, in a row, then they'll start to back off and the market will widen. On the floors, you must make markets if you're standing there, so the widening of markets only happens in real extreme periods. |
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One of the issues that the exchanges currently have to address is providing for accountability, having a team of traders and market makers that will be responsible so we won't have dark screens in these illiquid times. |
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You'll have just as spotty bids and asks when the market is officially on a screen as you would today if you woke these guys up at 4 a.m. and asked them if they wanted to make the market. |
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