Paradigm Shifts & Unintended Consequences: The Death of the Specialist, the Rise of High Frequency Trading, & the Problem of Duty-Free Liquidity in Equity Markets

Abstract

An exploration of the implications of government mandated economic policies and resultant fragmentation of the U.S. equities markets. This article begins with an historical framework presenting the structural market changes that inadvertently led to a near collapse of well established and time-tested mechanisms for protecting the integrity of equity markets. The article continues by discussing the problems inherent in the disconnect between lawmakers and equity market participants. Next, issues regarding the disparity between legislative intent and the actual subsequent result of that legislation when implemented are discussed. Finally, potential solutions to this paradoxical outcome are presented for consideration.

Keywords: NYSE, High Frequency Trading, Specialist, Market Makers, Equity Markets, Electronic Trading