Market makers differ from specialists

A market maker does none of the things that Mr. Aikin describes, but buys and sells out of his or her own account to accommodate orders from entities that are basically “non-customers” to the market-making function within a firm.

Blaine F. Aikin’s diatribe against The Goldman Sachs Group Inc. in the Fiduciary Corner column “Goldman proves need for higher standards” (May 10) contains the following statement: “The primary responsibility of a market maker is to maintain an orderly market by matching buyers and sellers of securities and to stand ready to buy or sell for their accounts when there are price imbalances.”

That is absolutely false.

Insert “specialist” where “market maker” appears, and he is correct.

A market maker does none of the things that Mr. Aikin describes, but buys and sells out of his or her own account to accommodate orders from entities that are basically “non-customers” to the market-making function within a firm. Market makers don’t match buyers and sellers, and only buy and sell for their own accounts.

A specialist transacts business as an agent on one of the many exchanges; a market maker as principal in over-the-counter trading. Neither actually makes the recommendations to the ultimate owners, either retail or institutional.

Also, ask Mr. Aikin to look up the legal meaning of the word “fiduciary.” The very word “fiduciary” implies, if not requires, a discretionary role for the broker/adviser, such as that occupied by a trustee. Most brokers don’t want that role, and want simply to make recommendations and allow the client to choose to act on them or not.

That isn’t a fiduciary role.

Putting the client’s best interests first (which everyone agrees should be the case) is simply not the same as being a fiduciary. The plaintiff’s attorneys and media don’t want anyone looking at that too closely, so that they can sneak this new definition by us until no one in the business can defend themselves in our changing, volatile markets.

Ruth Gordon

Certified financial planner

Ameriprise Financial Inc.

Minneapolis

Response from Mr. Aikin, chief executive of Fiduciary360 LLC: With all due respect, Ms. Gordon missed the point of my column and also made quite a few misstatements.
Regarding the difference between a specialist and a market maker: In fact, a specialist is a market maker. The term “specialist” is generally associated with stock market trading and is somewhat dated.
However, the assertion that market makers trade only for their own account is completely extraneous to the point of the article. Goldman is alleged to have traded actively for its own account to make trading gains, not just to capture the spread — going short while actively promoting long positions in customer accounts.
In the sentence cited from my article, the operative phrase pertains to the “responsibility of a market maker … to maintain an orderly market.” My assertion here is undeniably true.
Quoting from the New York Stock Exchange, “[Designated market makers] … have true obligations to maintain a fair and orderly market in their stocks.”
The assertion that market makers “[don’t] actually make the recommendations to the ultimate owners” is true for traditional market makers such as designated market makers who deal in stocks. However, a central point of my column was to note that in the Abacus case, Goldman’s role(s) could hardly be characterized as being confined to traditional market making.
With respect to the legal meaning of the term “fiduciary,” the statement, “The very word “fiduciary’ implies, if not requires, a discretionary role for the broker/ adviser” is only half right. Discretion does create a fiduciary obligation, but it is certainly not the only circumstance in which fiduciary obligations arise.
Most notably, the fact that one who renders comprehensive and continuous investment advice must also adhere to a fiduciary standard is overlooked. Although it is correct that purely transactional brokerage isn’t a fiduciary function, it is when practitioners of transactional services such as these migrate into the realm of advisory relationships, giving rise to potential fiduciary obligations and conflict-of-interest problems.
Finally, my column was intended to point out that if the alternative to the fiduciary standard — the fair-dealing standard — is so low as to allow behavior such as that alleged to have occurred in the Goldman/Abacus case, then too little is expected of financial services firms and their representatives.

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