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Market makers are stock brokerage firms which are members of FINRA, formerly the NASD. 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. Market makers use rule 15c211, in that a 15c211 is filed for them to trade any given security.
Without market makers, you would have an extremely difficult time finding a buyer or a seller for an exact number of stock shares at any given time. Market makers take on a big risk by purchasing a large volume of shares from a seller, when they don’t have a buyer lined up yet. By doing this, they could potentially lose a large amount of money (if the stock drops while they have the shares).
Because of this risk, a market maker will keep a spread on the stocks they purchase. There may only be a difference of pennies between the ask and bid price, but due to the sheer volume of shares, they can still make a considerable amount of money on this type of transaction.
In the USA, the American Stock Exchange and the New York Stock Exchange have a single exchange member, or stock specialist, who acts as the market maker. On the NASDAQ and other US stock and commodity exchanges, there are many competing market makers in any given security. They are required to buy and sell at prices matching their displayed bids and offers, and do not have the same advantages of a specialist.
Proponents of the market maker system believe that they add to the liquidity of the markets by assuming the risk and taking short or long positions to make a profit. |
