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November 1, 2010

Time's Insights

By Michael Scotti

Some issues never die. I recently saw a Time magazine headline that amazed me. It read: "Is the U.S. Going Broke?" There was a rendering of Uncle Sam with empty pockets. How relevant, I thought, given the recent massive government spending. However, the issue was from March 13, 1972. I thought I was in a time warp. Nothing seems to change: The cover story examined rising taxes, the middle-class squeeze and paying for government workers.

Michael Scotti, Editorial Director

"Teachers, government clerks and other civil servants in the past struck a tacit bargain under which they accepted relatively low pay in return for easy work, short hours, job security and relatively high pensions," Time wrote. "Now they are demanding--and increasingly winning--wages just about equal to those in private industry. The effect on budgets has been catastrophic."

Most states never solved that problem. Now deficits and pension shortfalls are the norms. The same Time issue also contained a full-page public service ad from a group of OTC dealers promoting Nasdaq, "the revolutionary new information system" that "brings you accurate quotations--current within a few seconds." Actually the quotes were an average of all the dealer quotes and you still needed to call for the best price.

The Nasdaq prospered--with no small thanks to the dealers who were ready to trade with individual investors. It eventually grew into an institutional market. Traders went from buying hundreds of shares in its early days to tens of thousands of shares on the integrity of a handshake. That's history now, and there is little difference between the primary markets today, as they are all electronic.

To go from quotes updated every few seconds to executions in microseconds today is revolutionary. The marketplace once supported by traditional dealers, both market makers and specialists, is no more. That shortage of market making standards, some say, exacerbated the May 6 "flash crash." This month's cover story looks at market making.

The Time magazine ad artwork was prescient. It showed groups of investors and traders drawn in pencil making their way to a funnel that connected to Nasdaq's first quote machine--the Bunker-Ramo quote display. A friend jokingly asked about the ad, "Is that a funnel [for their quotes] or a meat grinder?" For the traditional market maker, we know the answer.


Michael Scotti,

Editorial Director


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