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For all practicable purposes, the Order Handling Rules have created the opportunity for the average person to compete directly with the market-making pros. Through ECNs, any trading entity (individual, institution, money manager, hedge fund, investment club, etc.) can place limit orders that will be reflected on the Nasdaq screen, thereby giving that entity the same competitive advantages the market-making community has enjoyed for decades. |
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This new trading situation must be driving the market makers crazy, because the DAET traders are now creating their own wiggles and jiggles. The fact is that this new opportunity exists and will be expanded upon until a truly level playing field exists in all the financial markets. In addition, the SEC rules have dramatically reduced spreads, thus giving all trading entities the opportunity to quote in smaller increments. No longer do market makers have to compete only with each other; they are now forced to compete with every limit order. This fact will surely make it more difficult for them to post the record earnings they have been showing for many years. |
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A market-making style of trading involves using the spread to your advantage rather than having to overcome it. A market-making-style trader looks for stocks that are very often not as volatile as momentum trading stocks. The securities that a market-maker-style trader usually trades have a modest spread and do not fluctuate significantly in price. The objective is to buy on the bid side of the market and sell on the offer side, making the spread the significant portion of the potential profit, as market makers have done for years. |
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Spread cutting, where a trader competes on price rather than favoritism or payment for order flow or general good old boy techniques, is a strategy that has suddenly appeared. Despite the fact than many spreads have already been reduced significantly, there are still countless opportunities for a market-making-style trader to compete on a price-competitive basis since there are almost 6000 Nasdaq stocks. As soon as ECNs can compete head-to-head with exchanges, thousands of more stocks will be available for price-competitive trading. |
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