What you would liked about quoting convention

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Reference no: EM133300907

Question: Based on the case study Quoting Convention of NASDAQ Dealers Prompts a Justice Department Probe point out what you would liked about this analysis and do you agree or disagree with it?

Case Study: Market makers have a major impact on the trading system. By colluding together to maintain sizable spreads between asking and bid prices, these market movers basically guarantee large spreads and high transaction costs for anyone trading NASDAQ stocks. These companies profit from this role because they can essentially guarantee that they buy a stock at a lower price and sell it at a slightly higher price. The difference between these two prices is the spread that they companies profit off of. Market makers face a direct equilibrium relationship between spreads and the degree of informed trading risk faced by market makers from insider trading (Gleason, 2002).

In the quoting system, the market makers keep the inside spread to be at least 3/4 of a point. There is then an odd-eight fraction bidding rule if the stock in question gets a spread below 3/4 of a point. If the spread is above 3/4 of a point, then they must stick to an even-eight bidding rule. The market makers reached a common understanding to adhere to the quoting conventions to keep them in place. They use peer pressure and claim it is unethical to break the spread. The companies have also banded together to threaten to refuse trading with a company if they violate the quoting convention.

This type of quoting convention works because all of the companies agree to abide by the rules. As long as all companies agree to follow the rules, there is a high chance that these companies will make profits. These rules were present in this case and are evident in the actions of these market movers banding together. The result of this quoting system is an unfair market that is not free for all participants. These companies guarantee a profit for themselves while guaranteeing high transaction costs for anyone trading the stock with their inside spreads. I believe this quoting convention is unethical and manipulative to the free market.

Reference no: EM133300907

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