Market Makers and Specialists:-
Perhaps I can help with these terms.
A market maker (MM) refers to any broker/dealer who "makes a market" in a stock. This term generally applies to NASDAQ stocks. A MM will show his best bid and ask for a particular stock, as well as the size of each. Lets say he is willing to buy XXXX at 8 1/8 and sell it at 8 3/8. Lets say that 8 different firms make a market in XXXX - each would post their bids and asks on the system and the best of each would be shown. Each MM will look at their competitors prices and either match them, better them, or stay where they are. Now if you or I want to buy 500 shares of XXXX, we can buy it at 8 3/8, the asking price. I am not sure how the system determines which MM to buy from. If I place my order thru, say, Lombard, Lombard in turn will enter my order and get it filled at the ask.
Similiarly if I wanted to sell my 500 shares of XXXX, I could get 8 1/8 for it because that is the bid price. The "spread" between the bid and the ask is to compensate the MM for his risk in having a position (inventory) in a stock.
The term Specialist typically refers to a member of the NY Stock Exchange. Each NYSE stock is assigned to 1 specialist who is responsible for maintain as orderly a market as possible. The specialist sets his bid/ask based on the buying and selling of the people who come to him with their trades. This buying or selling can be electronic or physical on the floor of the exchange. The specialist will maintain some stock in inventory- which is his supply to sell at the ask price if there are not other sellers. Similiary he will buy at his bid price if there are not other buyers. Ideally he is matching buys and sells all day long and the prices reflect the supply of those who want to sell and the demand of those who want to buy. We are talking about supply and demand and the,hopefully, efficient working of the stock trading system. Stocks trade at prices determined by supply (People who have stock for sale and demand (people who want to buy that stock).
Perhaps the MM or Specialists can be viewed like a merchant selling say umbrellas. He know that he can buy umbrellas at $5 and tries to sell them at $6. If there is a large supply of umbrellas for sale he might be able to buy them for $4 and but only sell them for $4.50 ( and lose money on the ones he bought at $5). Or, if suddenly it starts pouring (or a really good earnings report comes out) he might be able to sell them for $7 or $8 because so many people want them.
Just to complicate things, NYSE listed stocks can also be traded by MM's, but that's a different story. Hope this helps. Larry |
