SEC NASDAQ Settlement

In late 1996, a settlement was reached between the SEC and NASDAQ. The goal was to achieve a price improvement that would benefit small investors. The result was a rule change that allowed individual investors to have better access to the market by improving the display of stocks and the execution of orders during the buy.

The first phase of the change occurred in January of 1997 with 50 stocks starting out the program. From there, the number of stocks included increased. This allowed investing to be easier for individual investors within the NASDAQ exchange.

As for what led to the settlement, it was because there were many people complained that some of the shares traded within the NASDAQ exchange had such high spreads. What was determined by the SEC was that some of the market makers were not posting certain orders publicly within the spread because their profit margin would be impacted. This was why the spread seemed so wide to investors.

Settlement Changes

There were a number of changes that occurred as a result of the settlement. One of those changes was that NASDAQ has to publicly display all limit orders that add to the size of a share's quote and those that have better prices than their public quote. In other words, the NASDAQ has to share all share prices no matter what, even if it has an impact on the market. That's how trading remains fair.

Any and all prices that were available before the settlement are also available to investors. The idea behind this and all other changes that occurred as a result of the settlement is to ensure that there is fair trading within the spread that was once so wide. The settlement has enabled investors more trading opportunities, which has made trading within the exchange fair for all.

What this says to the investor is that the SEC is looking out for them. It is the job of the SEC to make sure all actions within the stock market are fair and to investigate those actions that are not. This has allowed the individual investor much more freedom.

Market Makers

It is important to note, however, that the market makers take a risk themselves. They will buy stocks that are performing well and hold an inventory of that stock. They will then sell that stock to investors. By doing this, they expedite the trading process. If the market maker makes bad move, they have to make up their bad move by making money on the spread.

If a market maker can't make money on the spread, they are left holding a bad stock and they are not going to be able to sell that. This means they have taken a loss and this can have an impact on the market. To some, the settlement with the SEC has left them with a reduced opportunity to make a profit. Luckily, however, the market makers and the many investors have been able to adjust to how the NASDAQ has been dealing sine the 1997 settlement.

In order to get more people to invest and for it to be done fairly, the SEC settlement with NASDAQ was a necessary evil since the SEC does look out for the investor. They look out for the market makers and the corporations as well, ensuring that shares are priced correctly, trades are conducted legally, and that all is fair. This is what keeps the stock market in check. Even during the bad times, the SEC is there, researching and rectifying issues so that things will always be done better.

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