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quotation information. As stated in the 88th Congress, 1st Session, Special Study of the Securities Markets, in 1963: |
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By quoting ostensibly firm markets over the telephone or wire, dealers represent that a unit of trading can actually be bought or sold at the prices quoted. Upon the basis of these quotations, professionals check competing markets and prices and make their trading decisions. Broker-dealers also obtain these quotations in connection with their retail activities, so that investment decisions of customers and the quality of executions for customers may depend on them. In these and other respects, backing away from quotations impairs a basic mechanism on which orderly operation of over-the-counter markets depends. |
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Market makers have a fundamental obligation to honor their quotations. Market-maker quotations are one of the foundations of the Nasdaq market and the national market system. The reliability of quotations is essential to investor confidence and to an efficient process of price discovery. Failure to honor quotations deprives investors of the liquidity that market makers advertise they will provide, and diminishes the credibility of the market. |
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When quotations are not firm, investors seek other means for order execution, which results in market fragmentation. For example, during the course of the investigation, one options market maker informed the staff of the SEC that over the years he had directed approximately 95 percent of his trading in Nasdaq stocks to Instinet and stated that most traders use Instinet because they believe it has better prices and firm quotes. This options market maker stated that Nasdaq quotes are rarely firm and Nasdaq market makers would not display his bids between the inside spread. |
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The term backing away is the heart of the argument in favor of DAET trading. Backing away occurs when a market maker wiggles out of an improvident trade and backs away from a customer order. If market makers honored their market in the first place, there would have been no need for the Brady Commission to have recommended mandatory use of the SOES system to enhance liquidity. In point of fact, SOES was a self-inflicted wound by the financial industry. |
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