Nasdaq Essay

1. What role do market makers play in the trading system? How do they profit from this role? How do the market makers compete with one another?

2.1. A major role in the activities of NASDAQ is played by the market maker. Market makers at NASDAQ execute their tasks through a computer network. The major responsibilities of market makers include the filling of orders on behalf of the customer. They also fill orders for their own account. Market makers also benefit from the difference between the ask and the bid prices, in terms of acting as a dealer. Market makers at NASDAQ are responsible for the provision of a market for the listed securities and the provided prices (both ask and bid prices)

2.2. Profits: * making money
How do the market makers enforce the quoting convention?

The Department alleged that traders used the telephone to enforce adherence to the quoting convention. Traders who mistakenly entered a price quote of an eighth were promptly telephoned by other traders and told to correct their price quote. Traders would also make harassing calls to other traders who did not adhere to the quoting convention. The Department said that some traders often refused to deal with other traders who did not follow the convention. The Department said that new traders were trained to update their price quotes in quarters for stocks with wide dealer spreads, and taught that quoting those stocks in eighths was unethical and unprofessional. The Department alleged that market makers used peer pressure to enforce the agreement. A market maker who deviated from the quoting convention might be told-- "You're spoiling it for everybody."

The Department's competitive impact statement notes that: * Market data show that market makers began to change their price quoting practices when confronted by the adverse publicity from the Christie/Schultz economic study and the increasing pressures from government