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

A market maker is a stock brokerage(the price they offer to sell it for).
firm, which is a member of FINRAThey sell to and buy from their clients
(Financial Industry Regulatoryin foreign markets, where most deal are
Authority), formerly known as the NASDdone over-the-counter. By providing
(National Association of Securitiesextra liquidity, this reduces the cost
Dealers).of transactions for clients and makes
Market makers quote buy and sell pricesthe trades worthwhile. If not for the
for financial commodities, making amarket maker, they would have to accept
profit on the difference between the bida low price for the stock or not be able
and the offer spread. The market makerto trade it at all.
gets compensated for providing liquidityIn the US, the AMEX and NYSE have a
in the market. A market maker is alsosingle exchange member, also known as a
involved with rule 15c211, in that astock "specialist", who acts as the
15c211 is filed for a market maker tomarket 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 anliquidity to the market, prevents excess
order with your broker, the transactionvolatility, and takes the other side of
takes place within seconds. The processtrades 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 thethe specialist is privy to trade
scenes where the market makers line upexecution advantages.
the buyer with the seller and viceOn the NASDAQ and other US exchanges,
versa.there are many competing market makers
Without a market maker, it's veryin any given security. They are
unlikely that you will be able to find aobligated to buy and sell at prices
buyer or a seller for an exact number ofmatching their displayed bids and
shares at any given time. The marketoffers, and do not receive the
maker will buy a large number of sharesadvantages of a specialist.
from a seller, even when they don't haveProponents 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 valuethe liquidity of the stock and
of the stock falls while the stock is incommodities markets by taking assuming
their hands, they could lose arisk and taking short or long positions,
significant amount of money.to hopefully turn a profit. On the
To prevent this from happening, marketLondon Stock Exchange, market makers can
makers maintain a spread on every stockalways buy and sell stock. Each stock
they buy. There may only be a $0.05always has at least two market makers
difference between the ask price (thethat are obliged to deal.
price they buy it for) and the bid price



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