[throwaway283719]

The trouble with this argument is that, on basically every exchange in the world, you do not get to find out if someone has matched with your passive order until after the trade has happened.

There is no possibility to "back away when a matching order comes in" because the first time you find out about the matching order is when you are informed about the trade that you just did!

What can happen is that a market maker will post liquidity on multiple exchanges A, B and C, and will remove their orders from exchanges B and C if they are filled on exchange A (assuming they are fast enough to do it!)

This is not shady or nefarious. In fact, it is the only way that a distributed market could possibly work.

The market maker has some finite capacity to provide liquidity (e.g. they have position limits, they need to post margin, they have certain risk tolerances). They want to maximise the chances of their orders being traded on (i.e. providing liquidity), so they post liquidity on all available markets.

When they match on one of those markets, their capacity to provide liquidity has diminished, until they manage to offset their position somewhere (either on the same market, or on a different one). Moreover, they have just received a new piece of information about the supply/demand imbalance for this particular stock. For both of these reasons, it is natural to assume that they would want to adjust the prices they are offering on other exchanges. The market cannot function any other way.

[tptacek]

I like asking programmers to think about the CAP theorem when they consider this problem.