Re: market makers

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: market makers
Date: Wed, 26 Aug 1998 22:35:53 -0400

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>I know there are "market makers" for each stock but am curious- is there a

Actually, the Nasdaq uses market makers and the NYSE uses specialists.

A Nasdaq market maker is an entity which holds a particular stock as
inventory and posts bid and ask quotes that it is willing to buy or
sell at least 100 shares at.  The market maker makes the bulk of his
profits by pocketing the spread between bid and ask prices.

Until recently MMs didn't even have to expose customer limit orders.
So if you put in a limit order to buy INTC at $80 when the MMs bid
quote was $79.75, it was very common that no one would ever know about
your order, i.e. the bid quote would remain at $79.75.  Thankfully, that's
been changed, and MMs have to expose most (all?) customer limit orders.

The MM sets a bid and ask prices based on the supply and demand it is seeing.
I'm sure that computers are used a lot in setting these prices, but they
don't have to be.

Note that in general all Nasdaq trades will go through a MM, unlike exchange
trades.

>price"?  When you see footage of the  exchange floors, are the guys in the
>middle of the crowds the market makers?  

No.  They are the specialists.  They are tasked to help maintain an
orderly market.  Ideally (and unlike the Nasdaq system) trades occur
between brokers in an open outcry auction, not involving the specialist
at all.  However, if no brokers are currently interested in being
the counterparty to a trade, the specialist will often (and sometimes
is required to) buy and sell from his own account.  When he does so,
the trade must be of a stabilizing nature (i.e. must by an uptick in
a down market and vice versa).  The specialist also maintains the list
of limit orders on the stock he's specializing in.  He CANNOT trade
ahead of the limit orders in his book

For a far better first level discussion of all this, see the current
edition of Engel's _How to Buy Stocks_ at any library or bookstore.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.1



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