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Market Makers - What Is A Market Maker And Why Are They Needed?

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



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