| A market maker is a stock brokerage firm, which | | | | bid price (the price they offer to sell it for). |
| is a member of FINRA (Financial Industry | | | | They sell to and buy from their clients in foreign |
| Regulatory Authority), formerly known as the | | | | markets, where most deal are done |
| NASD (National Association of Securities Dealers). | | | | over-the-counter. By providing extra liquidity, this |
| Market makers quote buy and sell prices for | | | | reduces the cost of transactions for clients and |
| financial commodities, making a profit on the | | | | makes the trades worthwhile. If not for the |
| difference between the bid and the offer spread. | | | | market maker, they would have to accept a low |
| The market maker gets compensated for | | | | price for the stock or not be able to trade it at all. |
| providing liquidity in the market. A market maker | | | | In the US, the AMEX and NYSE have a single |
| is also involved with rule 15c211, in that a 15c211 is | | | | exchange member, also known as a stock |
| filed for a market maker to trade any given | | | | "specialist", who acts as the market maker for a |
| security. | | | | given security. The specialist provides a required |
| When you buy or sell a stock or place an order | | | | amount of liquidity to the market, prevents |
| with your broker, the transaction takes place | | | | excess volatility, and takes the other side of |
| within seconds. The process is quite simple for the | | | | trades when there are buy and sell imbalances in |
| buyer or seller, but the action takes place behind | | | | customer orders. Therefore the specialist is privy |
| the scenes where the market makers line up the | | | | to trade execution advantages. |
| buyer with the seller and vice versa. | | | | On the NASDAQ and other US exchanges, there |
| Without a market maker, it's very unlikely that | | | | are many competing market makers in any given |
| you will be able to find a buyer or a seller for an | | | | security. They are obligated to buy and sell at |
| exact number of shares at any given time. The | | | | prices matching their displayed bids and offers, |
| market maker will buy a large number of shares | | | | and do not receive the advantages of a specialist. |
| from a seller, even when they don't have another | | | | Proponents of the official market maker system |
| buyer lined up. By doing this, they take on a huge | | | | believe that market makers add to the liquidity of |
| risk. If the value of the stock falls while the stock | | | | the stock and commodities markets by taking |
| is in their hands, they could lose a significant | | | | assuming risk and taking short or long positions, to |
| amount of money. | | | | hopefully turn a profit. On the London Stock |
| To prevent this from happening, market makers | | | | Exchange, market makers can always buy and |
| maintain a spread on every stock they buy. | | | | sell stock. Each stock always has at least two |
| There may only be a $0.05 difference between | | | | market makers that are obliged to deal. |
| the ask price (the price they buy it for) and the | | | | |