Robert,
I had already worked out an idea on specialists, which I will try out on you.
Model:
From quote.yahoo.com , I get the average volume of SEG to be 2,445,363 per day. Some of these shares do not pass through the specialist and are crossed elsewhere (e.g. on regional exchanges). So for the sake of my model I will reduce daily volume to 2,000,000. If this is incorrect, adjust the model.
Second assumption NYSE is open 250 days a year. Again if incorrect, adjust the model
Third assumption, SEG is rarely as wide as 1/4 (bid-ask spread), occasionally 3/16 wide, often 1/8 wide, and always as wide as 1/16.
I will assume that it is always 1/16 wide.
If I were CEO of a specialist firm, I would be inclined to try to run the business on a near zero inventory basis, market neutral wherever possible.
2,000,000 shares times 250 days per year times 1/16 = 31,250,000.00 per year. If I could operate the business on near zero inventory and near zero market fluctuation and pull that in I would be delighted.
MER sold its specialist operation to FLT biz.yahoo.com
Work out the math. These are big companies. High volumes. If MER could actually achieve the spreads AND manipulate the stocks, they wouldn't sell for such a low price.
In fact specialists are buffeted by the market winds as well, and have costs associated with risk reduction (in the options market), as well as costs of inventory. They also suffer losses. In essence the spread is paid to them for the service they provide for providing "fair and orderly markets." |
