Nasdaq Case

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Nasdaq case
Q1: What role do market makers play in the trading system? How do they profit from this role? How do the market makers compete with one another?
A1: a. What role do market makers play in the trading system? The market makers play an important role in the trading system as catalysts, particularly for enhancing stock liquidity and, therefore, for promoting long-term growth in the market. In detail, they played two roles as below: 1) They act as brokers handling the limit order book, where limit and stop order are maintained. 2) They act as dealers by buying and selling stocks for their own accounts to maintain an orderly market and provide liquidity to the market if there is an inadequate order flow. b. How do
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There has been an almost complete absence of bid or ask price quotes in odd-eighths;

Q3: How do the market makers enforce the quoting convention?
A3: Market makers, including the companies here and others, frequently have used and continue to use an electronic trade system on which to buy and sell, at odd-eighth prices, the same stock that they have quoted and continue to quote only in even-eighth prices The fact that these companies have used and continue to enter orders to buy and sell stocks at prices quoted in odd-eighths on a proprietary trading system that shows that the absence of odd-eighth quotes is not the result of any fundamental attributes of those stocks and is evidence that the quoting convention has operated and continues to operate to keep the inside spread in numerous stocks at 1/4 point or greater.

Q4: What elements are necessary to make a convention such as this work? Were these present in this case?
A4: Yes, the three elements as below are presented in the case; 1) In contrast to the organized exchanges, the NASDAQ limit orders are not exposed to the public. These orders are executed only if the inside spread reaches the limit price. Therefore, the public can not directly compete with NASDAQ market makers by using limit orders. The insider quotes do not reflect the existence of the limit order. 2) The narrower spread will impose a greater economic risk to market makers. Therefore, they will not have self-interest to narrow the

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