Reconsidering the Affirmative Obligation of Market Makers

Market makers on exchanges regulated by the U.S. SEC are subject to an affirmative obligation to make “fair and orderly markets,” and in return, they receive certain benefits. Financial economists have long been skeptical, however, of the efficacy of a legal requirement to “do good” and have found little evidence that the requirement contributes to the quality of markets. Moreover, competition across markets reduces the willingness of market makers to stabilize markets, and electronic trading reduces the importance of market makers.