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Traders Magazine, May 2005

John A. Byrne

In recent years the question persists: What is a Nasdaq and OTC market maker? It was an easy question for Traders Magazine in a bygone era. But with the eclipse in the traditional role of the market maker, there is a certain hesitation lately before answering. Nevertheless, by definition, the market maker is alive and well, even though at some desks his or her functions have been melded together with other areas. The dealer is said to perform much more agency transactions. The golden years of trading net and committing capital are history. Still, in this issue Traders Magazine received plenty of responses to its Annual Survey of Nasdaq/OTC Market Makers. In the purest sense, the last bastions of the OTC market are the Bulletin Board and Pink Sheets. But it would be wrong to dismiss the market maker function as irrelevant, notwithstanding the glorification of the agency model with Nasdaq's recent INET transaction. Sure, market makers have surrendered much control to the buyside. But market structures are so dynamic, that the latest hot thing - the algorithmic trade - could, in an odd twist of fate, be superseded one day by market making. Nothing seems impossible in market structure. Who, for instance, would have thought that Nasdaq would one day have its own trade-through rule? This controversial Reg NMS change is aimed at curbing trade-through abuses in one out of every 40 Nasdaq trades. That's about 98,000 trades daily, according to the Securities and Exchange Commission. But the SEC's idea with this "Order Protection Rule" has more to do with regulatory consistency in both listed and Nasdaq markets. That is important as Nasdaq market participants, including speedy ECNs and ATSs, compete for more listed stock orders.

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