Abstract
arrell and Seguin (JS) agree that there are questions concerning short-term price volatility and the adequacy of market-maker capital, but doubt the advisability of involving listed companies in market making in the manner I have suggested. At issue is whether my proposal would indeed stabilize prices. I believe it would. I believe that all price changes are not straightforwarld reflections of news and that the search for new equilibrium following informational change is a noisy process. Alternatively stated, in non-frictionless markets, all price changes do not take place along long-ntn market demand curves, and the relative inelasticity and instability of short-run demand can cause exaggerated short-run price swings. For this reason, additional liquidity must be supplied to a marketplace. [Given this need, I stress the advantages of allowing corporations to commit capital to market making if they so choose: 1) their self-supply of capital could be substantial, 2) they would realize an important benefit that would not accrue to a third-party market maker (a lower cost of equity capital), and 3) their involvement could obviate a further concentration of power in the securities industry. ’There is a problem, however extending this freedom to corporations might also enable them to mimipidate share prices. My solution is to establish a fully articulated, transparent procedure. I propose that each firm trade only prescribed amounts at predetermined trigger prices according, to a formula with publicly known parameters, at market openings and reopenings only. JS are concerned, however, that this would result in capital being ”supplied by issuing corporations in a mandated, knee-jerk fashion that is, automatically and inflexibly.” 13ut I know of no alternative for preventing price manipulation, avoiding gaming against the corporations, anti assuring investors that a company is indeed committed to providing liquidity. JS’s comment focuses specifically on issues concerning leverage, trading halts and call auctions, and information arrival. I will respond to each in turn.
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