Felix Salmon
186 μ¢¤³£ ¬μμ¬
market in which, as Mattli writes,
almost everybody was “socialized into
the value system o the Exchange” and
had strong Änancial and reputational
incentives to live up to those values.WHEN BAD GOVERNANCE PAYS
Those days are over. When the £Ý¤
was a monopoly, before 2005, a single
rogue specialist could destroy the
reputation o the entire franchise, and
so the exchange was always working to
improve its governance standards. But
the £Ý¤ is no longer the only game in
town. Today, there are 23 dierent
registered “national securities ex-
changes” in the United States, o which
the £Ý¤ is merely the second largest,
accounting for about 12 percent o the
total U.S. market. It competes directly
with exchanges bearing names such as
«¬Þ, Cboe ÝÞ, and Nasdaq «Þ (not
to be confused with Nasdaq Þ, Nasdaq
³¤«Þ, Nasdaq ¤, or Nasdaq ̈§Þ—
none o which is the main Nasdaq
exchange that ordinary investors know
about). And because it has to compete,
the £Ý¤ has gone from a powerful
norm setter and regulator in its own
right to just another market partici-
pant, trying to bolster its position at
any cost. Today, stock prices move up
or down by 75 cents almost every
minute o every day, and the £Ý¤ has
neither the ability nor the inclination
to stop that from happening.
“In the new era o fragmented mar-
kets,” Mattli writes, “costly investments
in good governance and commitments
to fairness, equality, and transparency
have to be balanced against an overriding
new mandate to attract liquidity to
survive.” Exchanges do everything they
can to attract the business o the major$100,000 in today’s dollars) because he
left his post to go to the men’s room for
eight minutes and gave inadequate
instructions to his assistant. The man in
question worked as a specialist—an
employee at the exchange who serves as
an intermediary between buyers and
sellers. Part o his job was to buy into
selling pressure—buying stocks even as
their prices were falling so as to ensure
smoothly continuous trading. But when
the specialist went to the bathroom, his
assistant didn’t keep buying, and the
price o the stock he was charged with
overseeing fell sharply, by 75 cents.
Seijas later defended the specialist,
saying that the man had spent four hours
performing superbly before taking a
bathroom break.ßA colleague simply
retorted, “Don’t tell me he stopped at 20
red lights and only passed one.”
Indeed, the specialist himsel likely
expected a penalty and understood that i
negligence went unpunished, the conse-
quences for his chosen vocation would be
much worse than a one-o $50,000 hit.
From the 1980s all the way to the early
years o this century, any such breach o
protocol was almost certain to be
punished, reinforcing the trust that all
participants had in the market.
Specialists played a central role in
maintaining that trust. They under-
stood trading patterns, knew who the
big buyers and sellers were, and knew
how best to match the two without
aecting prices. They made money, but
they did so transparently, surrounded
by traders who watched their every move.
Attempts to front-run the market—
buying or selling ahead o a client’s
pending order to pad one’s own proÄts
at the expense o the client—were
almost always detected. The result was a