Truman,
I'll try my best to answer your questions. As far as how the mkt makers work, in theory they work the same both on Nasdaq NMS and the bulletin boards. To be a mkt maker, you need to first meet NASD-specified "net capital" reqs, which basically says the broker/dealer needs enough $$$ to back up their trades. I don't know what the exact amount is, I should know, since I am currently studying for my Series 24 license (principal/branch manager license) but I do know its a lot of $$$--at least six figures in excess capital. I know because the firm I USED to work for wanted me to make markets in a couple of stocks but the firm wasn't even close to the net capital reqs. This is done so that, should a mkt maker take a bath on a stock they are making, that they can ably make good on the trades. There are two types of mkt makers. The first is the wholesalers. There are, I think five wholesaler firms out there--Troster Singer, Herzog, Wien, and Sherwood are four of them (due to the fact that I've been studing so late is why I can't immediately recall the other one). These wholesalers make markets in just about every stock that trades NASDAQ. They don't have a retail or institutional sales force, and their primary function is to make mkts in stocks. As a rule, the other mkt makers in a given stock are firms who have an interest in that particular stock. Lets say ABC Brokerage just took XYZ Corp public--ABC brokerage would make a mkt in XYZ, since their brokers are actively working the stock.
Mkt makers have garnered a bad image in the press lately, and a lot of it is unwarranted (again, in my opinion). I have been on both sides of the deal on this one--I spent last year exclusively SOES trading (that's another unbelievable story in itself), so I have been "working against" the mkt makers (when I was a 'SOES bandit'), and now work for a firm who makes mkts in about 20 stocks--both NASDAQ NMS and bulletin boards. The mkt makers serve as the parallel to the specialists on exchange-listed stocks. Here's the difference: let's say IBM, which trades on the NYSE, has one specialist (well, not counting the regional exchanges and 3rd mkts). This specialist is responsible for being the middle man on all trades involving IBM that are routed thru the NYSE. He is directly responsible for showing and establishing the ONE effective bid and offer on IBM, at least as far as the NYSE is concerned. Let's compare that to Microsoft, which has probably 20-25 mkt makers. At any time, any of the mkt makers of MSFT can raise the going bid or lower the going offer of MSFT. IMO, its a more effective mkt. In that, I mean, lets say you had one firm who was constantly selling, or selling short MSFT. That mkt maker would always show up as the "low offer" on the stock. So you would know who was selling the stock. If it was IBM, all of the selling (as well as buying) would be reflected through the one specialist, so you would be clueless as to whether the selling was distributed among several firms, as opposed to one big seller.
The way the specialists AND the mkt makers make their money is through the spread. Everyone gives the mkt makers a lot of grief, trying to say that they all work "in tandem." While there are isolated cases of this, I am quite convinced that by and large, this is not the case. Every firm has a different opinion on a given stock. A stock that my firm may love may be on someone else's "dog list." At my old firm, I ran their OTC desk, so I worked with the mkt makers directly. I am here to tell you that if there is collusion (as a lot of people allege), btwn the mkt makers, I sure didn't see it. I was entering decent-sized orders for NASDAQ stocks, and the traders at the different firms hated each other--I mean the traders themselves are compensated based on how much profit they make for their own accts, and they knew that you (the OTC desk guy) knew if they were really working your order, and if they weren't, you'd shop the business elsewhere, so I find it hard to believe they'd be willing to give up some of their own juice. Some were easier and more competitive to work for than others. The guys at Wien were, by far the best. They would work their a$$es off to make your trade. There were a couple of guys at Troster Singer who did a bang up job as well. Part two>>>> |
