The dealer markets are beholden to the Securities and Exchange Commission, as the U.S. bond markets are beholden to Japanese investors who purchase U.S. government securities. But the SEC must be attuned to public opinion. It is supposed to deliberate in a manner consistent with our best democratic traditions. Did it do so for Nasdaq? As we all know, the SEC is hell-bent in transforming Nasdaq into an auction market, a market operating on similar agency-style principles as the New York Stock Exchange. As the year draws to a close it looks as if the SEC, with the benevolent support of Nasdaq, is achieving that goal. Nasdaq desks are experiencing the shocks that come with revolutionary change: in this case, shrinking profit margins and excruciating readjustments. Is this the outcome of our best democratic traditions?
An expert on these matters, Wayne Wagner, delved into the changes in Traders Magazine last September. And it so piqued some readers we thought it deserved an airing again. Wagner had several provocative predictions: the number of dealers will shrink; ECNs will continue to prosper; sponsors and managers will find comfort in soft-dollar arrangements on Nasdaq; organizations that monitor trade execution quality will find more customers; commissions on Nasdaq will accelerate the move toward more agency trading; cost-efficient firms will make up in volume what they have lost in bloated margins.
It was indeed a provocative touch from Wagner. However, it might be premature to pontificate too loudly on the revolutionary changes. These changes include the order handling rules and most recently, the introduction of decimal pricing. Some readers think Wagner is on the mark. One, Leonard Vinci, the head of a Nasdaq agency desk in New York City (he does not want the firm identified) e-mailed to say the concept of traditional market making for Nasdaq stocks is "for all practical purposes, an anachronism." He did not forget the role of regulation. "This is the environment that the regulators have created and have to live with on an ever-changing basis. The rules are changing and are changing on a monthly basis." The new markets unfolding could benefit desks like Vinci's. And it still seems likely that capital commitment will play a major role, especially in markets where institutions are starved for immediate short-term capital. The final message is clear: Don't underestimate the role of the regulators and the lawmakers. Lawmakers – whose lifeblood is votes and the election victories they produce – would legalize whatever it is the people want: debauchery and decadence, morality and faith in the fatherland, mediocrity and half-baked solutions. Take your pick. This is "a republic, sir, if you can keep it," as Benjamin Franklin reputedly said after the Constitutional Convention.
On a separate note, Peter Chapman of Traders Magazine traveled to San Francisco to bring us this month's fascinating Cover Story on Barclays Global Investors. It is a revealing look at how the world's largest index manager distinguishes itself and makes money.
John A. Byrne
Editor
