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