broken markets regulatory purgatory

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1、4RegulatoryPurgatoryIn1994,professorsWilliamChristieandPaulSchultzproducedaresearchreportthatwouldbecomeoneofthebiggestblackeyesfortheSECupuntilthattime.WhyDoNASDAQMarketMakersAvoidOdd-EighthQuotes?foundthatsuchquotes—think1/8,3/8,5/8,or7/8—werevirtuallynonexistentfor70%of

2、the100mostactivelytradedstocks.TheminimumspreadonmanyNASDAQstockswasfoundnottobesmallerthan$0.25inmostinstances.Christie-Schultzstated,“Weareunabletoenvisionanyscenarioinwhich40to60dealerswhoarecompetingfororderflowwouldsimultaneouslyandconsistentlyavoidusingodd-eighthquot

3、eswith-outanimplicitagreementtopostquotesonlyontheevenpricefrac-tions.”Althoughtheydidn’texplicitlyallegecollusion,manywhoreadthepaperbelievedmarketmakerswereincahootswitheachother.Howcouldthisbe?Howcouldoneofthebiggeststockmarketsintheworldconductbusinessnotmuchdifferentl

4、yfromthemafia?AndwherewastheSEC?Theindustryimmediatelycameunderintensepoliticalandmediascrutiny.TheSECwasputonthedefensiveandknewithadtoact.Itwasabouttoembarkonaseriesofregulationsthatwouldbethebuildingblocksforourcurrentfragmentedequitymarket.WhethertheSECknewitatthetime,

5、theCommissionwasplayingwiththefutureofWallStreet.Itsactionswouldcausethousandsoflostjobsastradingsystemsrunbypeoplewerereplacedbycomputersystemsthatwouldeventuallyleadtotheproliferationofalgorithmicandhighfrequencytrading(HFT).6768BrokenMarketsEarly1990sChangeinRegulations

6、OnethingalmostalltheseregulationshadincommonwasthattheywereapprovedundertheleadershipofSECChairmanArthurLevitt,whorantheCommissionfrom1993to2001.Levitt,whoarrivedayearbeforetheChristie-Schultzstudy,seemedlikehewasonaquestto“fix”theindustry.Inparticular,webelievedthatLevitt

7、wantedtocrushInstinet.InSeptember1995,theSECproposedtheOrderHandlingRules.1Thiswasanattempttoaddmoretransparency.Afterreceiv-ing152comments,theruleswereapprovedandthenimplementedinJanuary1997.ThepartcalledtheDisplayRulestatedthatmarketmakersandspecialistsshoulddisplaypubli

8、clythelimitorderstheyreceivefromcustomerswhentheordersarebetterthanthemarketmaker’sorthes