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SOES, and for whom was SOES use intended. However, these questions were not even a subject of NASD concern in the beginning. The SOES system was just an automatic market execution system to make the execution of small orders more efficient. |
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The market makers contributed to the crash of 1987, and if not responsible, they certainly exacerbated the collapse by withdrawing their markets from the computer screen. The markets just disappeared. Investors watched in horror as their lifetime savings were melting. Equity vanished as investors couldn't buy or sell any stock position. All they could do was listen to an annoying busy signal on their broker's telephone because the market makers vanished when no market maker wanted to buy in a collapsing market. To the market makers the market disintegration was like the ultimate punch line to the quintessential Wall Street joke, "Sell to whom?" |
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As the stock market was crashing, market makers abandoned their market-making duties en masse at a time when their support was most needed by the general public. This was a tremendous breach of duty. The market makers disregarded their obligation of making orderly markets in an orderly manner, causing millions and perhaps billions of dollars of losses and a total lack of confidence in the Nasdaq market. This wholesale withdrawal of the orderly market made a sham of the Nasdaq market. Customer confidence eroded as dollars were lost and the market-maker system proved itself to be a cardboard facade. |
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SOES was expanded after the 1987 crash. The Brady Commission was appointed to investigate the reasons underlying the stock market collapse and to help assure that another crash did not occur. Nasdaq proposed to make SOES participation mandatory for all market makers. Prior to the crash, market makers had voluntarily participated in SOES. Thereafter, if you chose to be a market maker, you had an obligation to honor SOES orders. To prevent a reoccurrence of the 1987 crash, the new rules placed penalties on a market maker's ability to withdraw from a stock. |
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