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The study also found that 9 out of the 10 market makers increased their frequency of posting odd-sixteenth quotes toward the end of the day. This was ostensibly because market makers, like electronic day traders, wish to lay off their inventory positions before the market closes and are forced to become more competitive in their quotation behavior. In a press release, Professor Whitcomb analyzed:
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This also explains why we see 50% odd-sixteenths on ECNs. Much of the trading there is market makers laying off their positions. When market makers have to trade in a competitive market trade anonymously with other market makers watching them, they behave competitively.
Professor Whitcomb added that the central finding of the ETA study was that there are two Nasdaq marketsan uncompetitive "advertised quote" market where retail investors are forced to trade and a fiercely competitive ECN market where many market makers anonymously trade.
The class-action settlement of over $1 billion was just a dime in a panhandler's cup when compared with market-maker profits. After a Department of Justice and SEC investigation, the entry of a federal court consent agreement never again to fix quoted spreads, and a class-action settlement, the market makers appear to have resumed the same anticompetitive behavior by reducing the "price convention" to a spread of an eighth instead of a quarter. It is the same thing all over again.
Payment For Order Flow
Payment for order flow is a practice whereby your broker receives a payment from the contra side of the transactions being executed for you. Remember that all transactions have two sides. For example, if you are buying a security, someone is selling it to you; and conversely, if you are selling a security, someone is buying it from you. Payment for order flow is akin to a kickback paid to your broker by the party representing the opposite side of your trade. Your broker pockets the referral

 
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