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N*PROVE was a NASD proposed replacement system for SOES. Despite all its advertised features to help the customer, N*PROVE was designed to kill DAET/SOES because it allowed a market maker to avoid its quoted price and back away from a trade with impunity. Market makers always want wiggle room; they would prefer to consider a customer order an option rather than an obligation. |
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Let me explain the nature of N*PROVE. Market makers never admit that they would use any wiggle room to avoid a trade at their quoted price because it would be illegal as well as unmacho. Wiggle room is any excuse or reason such as "SOES ahead!" (of your trade) for the market makers to avoid consummating an unfavorable trade. They want control over those they trade with and the price at which they trade. I was an SEC subject matter expert on the inner workings of the Nasdaq market. In January 1995 I testified in front of most of the SEC's ranking officials (with the exception of the commissioners themselves). Soon after, N*PROVE promptly disappeared, a situation unprecedented in SEC and NASD history. The N*PROVE system was ultimately withdrawn by the NASD without any formal action by the SEC. |
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Market-maker thinking is contrary to the way most businesspeople think. Most businesspeople have a retail mentality, where a sales volume of 5000 units is better than 1000 units. The market makers, however, did not want to be forced to trade unless they could preapprove the terms, and orders were considered a put or a call until the market maker could see which way the market would go. An article appeared on August 16, 1993, in Forbes magazine entitled "Fun and Games on Nasdaq," describing market-maker practices, including the harassment of traders who narrowed spreads. Notable magazines like Worth published articles on collusion and price fixing, but few high-ranking bureaucrats in the NASD read or cared. |
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Under the 1988 rules that made SOES participation mandatory for market makers, a market maker could be |
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