|
A market maker is a stock brokerage firm
that is a listed member of FINRA (Financial
Industry Regulatory Authority), formerly known the National
Association of Securities Dealers (NASD), that
provides a buy and sell price on a given inventory of stocks, on
a regular and predictable basis, and at a publicly displayed and
quoted price.
The act of providing a way or mechanism for all
interested parties to buy or sell securities, creates a market,
therefore the term Market Maker. Of course, the profit motive of
the market maker is to realize gains from the bid and offer
spread. Since the market maker firm accepts the risk of holding
securities that could lose value before they are sold, the gains
realized from the spread is their reward.
In the United States there are many market maker
firms, about 2,000 at last count, that service the needs of the
stock market. Many USA-based exchanges, such as the NYSE (New
York Stock Exchange) and the American Stock Exchange (AMEX) have
specialist market makers that officially regulate the trading of
particular stocks or securities. Other exchanges, such as the
NASDAQ (National Association of Securities
Dealers Automated Quotations), have over 500 competing
market makers with posted buy and sell prices to
provide their client's order flow for any number of given
securities.
Market makers provide for the efficient flow of the markets by
providing the underlying liquidity for buy and sell
transactions, infusing capital into the markets to provide the
supporting stability needed for the orderly execution of the
markets. Market makers give quotes on buy and sell
prices for financial stocks and commodities, making a profit on
the bid/offer spread. Market makers are compensated by
providing liquidity in the market.
It would be extremely time consuming and next to impossible for
buyers and sellers of securities to participate in transactions
without the services of a market maker. Since market maker firms
take a very big risk that the securities they introduce into
inventory could drop in value before they can find a buyer, they
make a profit from the buy and sell spread. The fact that they
take such a huge risk, and could lose a large amount of capital,
inspires the profits accrued by their valued services and keeps
the markets operating smoothly.
Needless to say, friends and promoters of the market maker
method feel that the added liquidity, the lesser volatility, and
the orderly operation of the market maker system is a plus for
the market in general.
|
