So we have gone from a central market place where institutions have provided liquidity to the equity market which lasted hundreds of years to 60 ECNs where the liquidity providers are High Frequency Traders, that trade ahead of the public because their computers receive looks at orders a fraction of a second before the public. They are gaming the system. There is no fair playing field and no depth to markets. We have gone from trading in eighths to nickels to sub pennies. We have gone from 16 to 20 to 100 price points per dollar. The Specialist System was scrutinized and crushed for the sake of faster more liquid markets. Computerized trading was inevitable. Unfortunately, the baby was thrown out with the bath water. The Specialist provided a degree of liquidity, but their real value added was to provide information to institutions both sell side and buy side. These institutions provided the real liquidity. With pennies , the incentive to make markets went to zero. Commissions went to zero. And market structure has become completely broken. Banks and institutions began to trade illiquid derivatives in order to uphold their balance sheets. 2008 showed us how that worked out. Now Banks , Brokers , and institutions are being Volckerized . They are not permitted to nor is there an incentive to make markets in equities.
What to do?
Create 20 price points instead of over a hundred, bring risk back into the formula of trading.
Allow institutions like JPM , Merrill, Morgan Stanley, ect to become market makers
Their balance sheets are huge
It will create thousands of jobs
Make all the Exchanges and ECNs compete on an even playing field
Upgrade technology to match that of High Frequency Traders
If a High frequency trader had to risk a nickel to make a nickel , they would all go away.
The tail is wagging the dog
Do this on a trial period and watch what happens
Market participation will explode and the public will eventually regain confidence in the market.
Technology upgrades will enable firms like Knight trading to stop a program gone awry.
The Specialist system is gone for ever. They provided information We need a platform for institutions to provide that information in their place electronically.
We need transparency. A qoute of 23.01x23.02 1x1 does not show any transparency
We need this now before its too late.