I think that's actually a great idea. In many cases it would also obviate the need for MMs, which would take a whole layer out of the market. I wonder if you set up an exchange that worked this way if it could coexist with the existing marketplace or if it would have to be the only way a product traded for it to work?
I think it could coexist, but cross settlement could be tricky.
To create the new exchange, you'd want to create your own version of DTCC. (Or at least I would.)
You'd want a new system that can settle for real every 5 minutes. That would have been hard 40 years ago. It seems well within the realm of possibility now.
If you settle real money and shares every 5 min, it's hard to play games.
IMO DTCC rules are way too liberal for market makers. They're allowed to run around with fantasy short shares for weeks on end. Their rules would break much of the point of creating the new exchange.
So to transfer shares between exchanges, you'd want to actually transfer them between clearing houses. That could take a while to settle.
On the other hand, where there's a market demand, there's a supply. I imagine someone would start filling that need by loaning shares on the new exchange to those who want to transfer... at a price. (They'd be assuming the risk of a DTCC default and waiting for the replacement shares to transfer.) That price would be an interesting metric for trust in DTCC... seems like it should be extremely cheap for anything that's not a "threshold security."
Stocks will become like homes (pre-Zillow buying spree). The price will be lower because holders will demand a liquidity premium and the assets will be much less liquid.
And opaque bidding will make it even worse. Price discovery will take many iterations as everyone will game the system instead of someone posting a public price and getting repeatedly walloped until he gets it right.
As opposed to a bunch of dark pools, HFT and payment for order flow?
I'd didn't mean to imply it would be completely like a sealed bid auction, I just used a sealed bid auction as an example to disprove the idea that you need a continuously executing market with no delays to discover a price for something.
Just run it like a market open but every 5 min. Provide all the same stats. You know what the price was 5 min ago, the volume and the bid and the ask. Number of unmatched shares, whether they we long or short, etc. If you look at opening and closing market volume right now, clearly there are many people comfortable transacting with that level of information. It's not like there's virtually no volume at open and the people wait for 1/2 hour of continuous trading..
