The Market Makers act as buffers buying and selling stocks from their own account when there are no buyers and sellers respectively for a stock providing a stable market.
MC, Nasdaq MMs are under no obligation to provide liquidity, keep an orderly market, or even answer their phones when there are no buyers and you want to sell. They are buying and selling for their own account, but they are doing so AGAINST you. According to a 1996 Forbes article, less than 2% of Nasdaq trades are crosses, i.e. customer to customer. It is not in their interest to cross trades but rather to buy from me at $50 and sell to you at $50 1/2.
NYSE Specialists, OTOH, generally just cross trades (with a computer doing most of them) and are prohibited from trading at the market (selling at the market ask or buying at the market bid) ahead of customer orders. They may, of course, buy or sell between the inside bid and ask to meet a customer limit order. That provides liquidity.
The point is that MMs are acting as principals, trading against you on a very un-level playing field. On the NYSE, everyone, except the other customers of course, is acting in an agency capacity. The "opposition", i.e. other investors, do not have access to the specialist's book and do not know where all the outside limits and stops are waiting. Those trading against you, in other words, have access to only the information you have access to.
Bob |
