But first Merrill would have to acknowledge that it might be worthwhile to outsource [market making]
Bob,
I've been curious about this outsourcing concept. Is there a particular reason why other firms that currently do some of their own market making (not just Merrill) would or would not consider outsourcing to an entity such as NITE? Rather like the way Dell or Gateway outsource the box building to Jabil.
If the trade generator (Merrill, FBOC, etc.) is going to get some payment for order flow anyway, why should that trade generator go to all the expense of maintaining its own in-house market making function? Yes, it loses out on the spread, but by outsourcing it saves on the very expense of running a market making operation.
On the other hand, I used to be at Fidelity. They used to send all orders to NITE, but then they started doing more and more of the big cap, liquid stocks (INTC, DELL) through their own market making operation in NYC. Fidelity mutual funds also use these Fidelity market makers. I just wonder how much extra profit Fido makes by doing this in-house, given the expense (payroll, computer equipment, etc.) involved. Payment for order flow has no such expenses. Just send orders, get paid.
What do you think?
Gary Korn |
