Who Is Making Your Market?
July 12, 2009 by Tisa Silver
Filed under Finance
Both of the major exchanges have market makers. Who is making the market for the stocks in your portfolio?
The New York Stock Exchange (NYSE) is an auction market. There is a physical location on Wall Street, where trades are delivered to specialists.
Photo by Neubie, courtesy of flickr
The job of the specialist is to maintain a “fair and orderly” market for their stocks. In most cases, each stock has one specialist and each specialist may be assigned to one or more stocks.
Specialists must post bid and ask prices which are used to match buyers with sellers. When markets are imbalanced, specialists may have to buy or sell shares from their own inventory.
On the other hand, the NASDAQ is an electronic exchange with no face-to-face trading. Trades are facilitated by multiple market makers called dealers.
Securities dealers, similar to car dealers, stand ready to buy or sell from their own inventory. There are multiple dealers for each stock (Investopedia estimates there are nearly 300 market makers), and dealers relay the prices at which they are willing to trade.
Both specialists and dealers profit from the bid-ask spread, which is the difference between the price they are willing to pay for stock (the bid price) and the price they are willing to accept for selling stock (the ask price).
Whether the market is physical or electronic, market makers must make certain there is a market for the securities they trade. After all, if there is no market and there are no trades, then there can be no profits.
