There shouldn't be any restrictions on short sales. As easy as it is to go long - it should be to go short. Such restrictions keep an uneven bias north, whereby some issues are artificially held up (or stay up a lot longer than they should). Absolutely.
I mostly agree with your second point, while not totally. Any market maker that ducks away from actually making a market should, after some amount of time (2 days, 14 days, 30 days, whatever), have those benefits and advantages they enjoy removed first temporarily - and, if they prove recidivists, permanently.
But, for those who do actually make markets - those who are there to take the other side nearly any time you look - I believe that they deserve certain advantages for incurring the risk of consistently putting their firm capital in the way. Nothing beneficial to the point that it decisively disadvantages individals, but, not the exact same regulations, either.
I believe that they key to a competitive, functional, and fair dealer market in NASDAQ is found somewhere between both providing some advantages to firms that actually make markets AND penalizing or barring from market making those who do not, relegating them to the world of proprietary, order entry trading - just like customers.
How about this for a rule: no market makers, no matter how properly or consistently they make markets, can use ECN's for anything but customer orders? That way, they couldn't hide on them. That might work.
All altogether, it's not an easy call to make. As you pointed out, Tony, there is a service aspect to the dealer market, while those same firms are clearly businesses as well.
All of this IMHO.
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