Hi All
Can anybody tell me how a Market Maker works on the floor of an exchange?
I see real time quotes as far as bid/ask but how does a stock actually sell/buy for? Any info on how these things settele would be great. T.I.A
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This will do better in GQ, as it has a factual answer.
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A market maker is an institution, bank, or individual, who maintains a constant offer on the table to buy and sell a given security. They allow for a fluid market, otherwise to buy 100 shares of Acme Corp. you would need to locate someone who wants to sell 100 shares of Acme Corp personally, and make them an offer. Market makers constantly buy and sell a given stock, irrespective of its overall value, market trends or speculations. So they might buy 100 shares of Acme Corp for 10.00 per share and then sell them to you for 10.02 per share. If the stock falls during the process they might sell them to you for 9.98 per share and take a loss. They cover this risk by sheer volume of transactions per day and carefully calculating the spread of buy and sell offers.
In general, market makers for NASDAQ stocks are brokerage firms. On the New York Stock Exchange, there is a specialist who handles a particular stock in the same way: they both buy and sell from their own account when they can’t match buyer to seller.
You can make good money doing this, since you’re taking a cut of every transaction. If you can find both buyer and seller, you get to keep the difference.
And of course, they also take a risk. If they can find a buyer and a seller at the exact same time, then they can be the middle man and pocket a cut while taking no risk. But that’s rare – it’s not common for two customers to contact a market maker at the exact same moment with matching buy/sell orders. Usually a customer wants to sell but there is no buyer at the moment. (Or vice versa). So the market maker will buy the stock anyway and hope that another customer shows up later that day so they can match up the buyer and seller rather than keeping the stock themselves.
The market maker theoretically shouldn’t care whether the market goes up or down, cause he’s supposed to just match up buyers and sellers; but in practice, he almost always has a large position of stocks that he hasn’t been able to get rid of yet. I used to work for a market making desk that got into big trouble cause there was a big market drop while they were holding some positions, and they lost a ton of money.
Thank you for your answer . I allways wondered how litely traded stock traded. Sounds like they can manipulate the strike price and sit and collect the div. if it improves their position. BTW how would I find out who the M.M. is for stocks I want to trade and if they have a position that is contrary to mine (THE FLOAT)?
Thinly traded stock just has a wider bid/ask spread and less volume. Yes, thin stocks are more easily manipulated, but it isn’t an easy thing to do. If a stock’s “real” price is $2 and a big player takes all the offers, the bids won’t necessarily move to the new price. The manipulator might end up with a bunch of stock he can’t unload, except at a large loss.
For individual stocks, you can buy data from NASDAQ detailing the most active market makers.
https://data.nasdaq.com/DSV.aspx
For NYSE stocks, go to www.nyse.com and do a symbol look up. That will show you the designated market maker (specialist) on the floor.
A market maker’s current long/short inventory isn’t something they are going to be sharing.
You mentioned strike prices… are you asking about market makers in options? There is always talk around options expirations that MMs will sell/buy the underlying in order to peg the price to a strike most advantageous for themselves. I, personally, haven’t noticed this, though. This site has a bit more about the idea:
edit:
It appears NASDAQ market maker daily share volume is free.
A market maker for Nasdaq stocks has to follow rules about reflecting customer orders. When you get to the Pink Sheets, then there are very few rules. So, you will find some market makers who do try make their money on a large spread. Of course, since those stocks are extremely risky, they’ll also get burned at times with an inventory of a stock which has ceased trading.