LOL. Well, I'm not sure what you mean by asking several times for my rational, but my rationale, in stating what I did, is this:
Regarding too abrupt a shift for individuals...
The shift to penny spreads quickly would disadvantage individual investors by possibly crippling trading systems with massive, sudden volume (see below).
Also, I'm quite sure that with penny spreads, in liquid stocks there will be many more levels, but all very thin. At times, execution obligation falls upon firms when a level disappears and the inside "falls on top of them" (along with orders leaning there). With penny spreads, instead of 1/8th and 1/16ths, I believe you'd see entire levels clearing out once a bid dropped one or two $.01/increments.
The trading and quote volume would increase because, with that many more levels, there would be a lot of jumping ahead/under and pulling of quotes, etc. Here are some numbers for you: I have, sitting right here on my desk, a report done by SRI Consulting stating that nickel increments would cause something like 3.5% more trades and about the same increase in quotes being transmitted. Straight to penny increments, and the increase in share volume would be 9%, with 81% more trades done and 231% more quotes transmitted. In addition, that the equity volume would (if in nickel increments) juice equity options markets by 52% and index options by 50%. To penny increments, and the equity options market volume would increase by 305%, with index options bumping up by 160%. Remembering as we should that large firms hedge eq. options with equities and vice versa, I'm sure that critical brokerage technology is not ready for that.
[W]hy should we care if [dealers'] profits decrease?
Dan, you can play the maverick if you like - it's the pop culture of the message boards I've mentioned several times, and I guess it makes people feel empowered (in that they're in some adversarial "struggle", whatever) - but you need dealers. Dan Clark needs a dealer to trade. Dealers don't need you. No, they aren't there at the NEXT level to catch you when you fall, after all, they're trading too. But, at some point, yes, a dealer's capital will slow, reverse, or extend the move.
And, if you are going to say that you can trade via ECN's, so, "who needs the market makers," be mindful that you never know whose orders are on the other side, and it might often surprise you. Anonymity is great for everyone.
If a dealer's profits decrease, they have less and less incentive to put their capital out there. That capital and the order flow that it composes or consumes on either end, is the gasoline of the stock market. But, being a dealer is a business (something most individual investors and traders don't, won't, or can't understand) and, when the margins shrink - just like drive-in movies and the makers of parachute pants - you adjust your business accordingly.
Remember: BUSINESS. Not service!
In the case of the market making firms, it's to call their shots more carefully, commit capital at crucial points, and generally to capitalize upon momentum. With nickel spreads, this business adjustment can be eased into, not only for the dealers - but for you, Dan Clark et al. - who rely (whether you'll admit it or not) on that capital eventually lubricating your trading experience.
Going to $.01 minimum benefits traders and investors.
Uh-huh. Straight to penny spreads and things would change quickly in a way that I don't think you'd like, but which I have no doubt you'd complain about. :)
Luckily, and happily, that's not going to happen...yet. We'll get to penny spreads eventually.
Regards,
LPS5 |
