In New York, the need for market-making is explicitly recognized and a designated market-maker-the specialist-always stands ready and willing to make a trade. Tokyo, on the other hand, has no designated market-makers and no official market-making activity.

In Tokyo, a saitori (order clerk) maintains the limit order book, which is open to all exchange members, but he does not trade in the security. He does set securities prices after trading halts and market closings, following exchange procedures that limit the rate at which prices can change. The exchange also limits total price movement through the imposition of price limits on individual stocks.

In New York, the specialist, charged with maintaining a fair and orderly market, acts concurrently as auctioneer, dealer and broker. He has broad, somewhat vaguely defined powers in setting market price, trading on his own account if he deems it necessary. Because of the far-reaching consequences of specialists' behavior, their performance is subject to several tests.

In theory, market-makers provide three services to investors-intertemporal smoothing of demand, risk sharing and the generation of endogenous liquidity. As these services are valuable to investors, there would seem to be sufficient incentive for market-making to take place in Japan. Indeed, Japanese security firms do appear to provide market-making services to their better (larger) customers through their judicious use of proprietary trades.