All of your questions will be resolved if you understand one key fact: "Exchanges are companies". If you want to know why they are not government entities, imagine the GOP backlash if they tried to own and run an exchange (I'm not sure how democrats would respond, but republicans would definitely cry wolf). They are businesses, which is why:
- market access and data will not be openly available at a reasonable price (you have to spend extra money if you want to redistribute the data). Yes, this is a profit center for the exchanges
- Exchange seats will be limited and cost money (profit center)
- Colocation will always cost money (people are willing to pay to colocate)
As far as DMMs are concerned, there is a legal obligation to place orders and offer a buy and sell price. More specifically, they are required to be at the inside bid or offer (buying at the best buy or selling at the best sell price) most of the time. This ensures that there's a reasonable counterparty when some other trader wants to buy or sell. There is some economic incentive to be a DMM, but they provide a real service to the markets.
A few example exchange companies that list on public exchanges:
Regarding corporate exchanges: they may be private companies, but they are heavily regulated and considered vital pieces of our economy. How can we sanely say something is financially vital to our country, and then exclude 99.9% of the population from it?
Regarding exchange business models: What about a transactional business model? Give people free access to the market, cut out the brokerage middle men, and charge players to place transactions?
Regarding DMMs: if there's a financial incentive to add liquidity as a DMM, why wouldn't the market naturally fill the role? Why auction the role off to the highest bidder?
"How can we sanely say something is financially vital to our country, and then exclude 99.9% of the population from it?" <-- How can we declare a private bank "too big to fail"? I mean, no we can't, but this isn't the only insane situation here.
"What about a transactional business model? Give people free access to the market, cut out the brokerage middle men, and charge players to place transactions?" <-- who fronts the cost of the exchange? Electricity, rent, salaries, etc. Amortizing the cost through trading fees isn't fair to those who trade, because there would be users of data who don't end up paying at all. I think if you accept that they are private businesses, the pricing model makes sense.
" why wouldn't the market naturally fill the role?" Let's say the market starts falling rapidly. In a pure-market system, no one would be able to sell. The DMM obligation ensures that, at the very least, some people would be able to sell at some reasonable price. Think about insurance companies: you make a small amount of money most of the time, and every once in a while you need to make a large payout.
- market access and data will not be openly available at a reasonable price (you have to spend extra money if you want to redistribute the data). Yes, this is a profit center for the exchanges
- Exchange seats will be limited and cost money (profit center)
- Colocation will always cost money (people are willing to pay to colocate)
As far as DMMs are concerned, there is a legal obligation to place orders and offer a buy and sell price. More specifically, they are required to be at the inside bid or offer (buying at the best buy or selling at the best sell price) most of the time. This ensures that there's a reasonable counterparty when some other trader wants to buy or sell. There is some economic incentive to be a DMM, but they provide a real service to the markets.
A few example exchange companies that list on public exchanges:
NDAQ: NASDAQ OMX Group lists
NYX: NYSE Euronext
CME: CME Group (Chicago Mercantile Exchange)