Mar. 07, 2023
March 7, 2023 In order to ensure an efficient and fair price discovery process in the market, it is essential that the law of supply and demand is respected. This law describes how changes in the price of a security affect its supply and demand: as the price increases, supply rises while demand declines, and vice versa. To make sure that this law works properly, all orders should be routed to the same order book on a lit exchange and be treated equally. This means that all exchanges should route trades to a single, combined order book that is visible to all market participants. Any orders that are not routed to a lit exchange, such as those that are internalized or conducted off-exchange, should be made illegal, as they do not contribute to true price discovery. Similarly, dark pools should only be used for their intended purpose of making large trades between institutional investors. Small orders should not be routed to dark pools, as they do not influence price discovery. There should be more regulation on dark pools and a minimal limit introduced, such as a minimal dollar amount, for when a trade could be routed to a dark pool. Infinite liquidity, such as that provided by naked shorting, should not exist as it is not natural to a market system. Instead, liquidity should be allowed to change via the law of supply and demand. Fail-to-deliver shares should not be allowed, as they do not positively affect price discovery. Payment for order flow (PFOF) does not benefit household investors and should be eliminated. To positively impact true price discovery, every order should be routed to a lit exchange, with the exception of large block trades between institutional investors. There should only be one order book per security, and all orders should be treated equally. Finite liquidity should be maintained so that there are never more shares of an equity in circulation than were issued by the company. Instant settlement should be the norm, with T+0 settlement becoming the standard in the near future. In summary, in order to ensure a fair and efficient price discovery process, all market participants should be on the same playing field. All trades should be routed to a lit exchange, with the exception of large block trades between institutional investors. Any practices that negatively impact true price discovery, such as internalization, off-exchange trades, dark pools, infinite liquidity, fail-to-deliver shares, and PFOF, should be eliminated.