I'll give my thoughts on a Central Limit Order Book...
The ideal solution, IMO, would meet the following requirements:
1) Must allow for instantaneous execution speeds to the counter order(s) with the best price/time priority. => First order in at the inside bid gets filled before any other order behind it gets filled. In this respect, it would be much like an ECN.
2) Must allow market makers to 'hide' the true size of their order. Also known as 'reserve size', I believe, this would allow market makers to place orders for 15,000 shares and have them displayed at only 1000 or 100 shares at a time. => However, if a matching order comes into the market for 5,000 shares, this entire order should be filled instantly, with the market maker quote still showing all or part of the remaining size of the order. In this respect, it would be must like certain ECN's such as INCA, BRUT and BTRD among others offering this feature.
3) Must treat all market participants equally. The current system allows market makers to maintain bogus quotes for up to 17 seconds without filling any additional size. This is an outdated feature with is not consistent with the capabilities of our electronic market. The Central Limit Order Book should know the true size of each and every order in the stock, and instantly fill orders to the maximum size possible against an incoming order. When an order on the book is entirely filled or exhausted, it should go away. Instantly.
4) One fine line of distinction for market makers would be a feature allowing them to electronically back their quotes away from the inside market by X points (1, 2, 10, who cares?), once their posted order is filled. This will allow them to maintain their supposed market maker function. In reality, market makers providing liquidity for the marketplace is currently a joke. I think serious consideration should be given to entirely eliminating the market maker system. What we actually have is a marketplace full of traders... Some trade for brokerage firms, market maker firms, and others trade from home, for hedge funds, etc. But together, these traders collectively provide the liquidity for the marketplace.
5) With the Central Limit Order Book, all ECNs and ECN fees would be eliminated.
I guess this post is already long enough. I'll leave it at that. Another interesting point for discussion would be what are the hazards and concerns of a Central Limit Order Book, such as described above? Would liquidity be better or worse? Would the average investor get better executions on average, or worse? Would the market be more fair for independent traders such as us, or worse?
Good luck,
-Eric |
