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