Certainly Jim.
The three main markets in the US are of course NYSE, AMEX and Nasdaq. The NYSE and AMEX are what are called "auction markets". Buyers and sellers are in direct competition for shares. When you buy, you are buying from a seller, and when you sell, vice-versa.
The Nasdaq, however, uses what are called market makers to facilitate trading. Market makers are firms who, in the companies they decide to make markets in, buy from the sellers, and sell to the buyers. They are middlemen. They make their money on the "spread", difference between bid and ask. They also speculate with the "inventory" of shares they hold. They can buy from sellers and hold on to the shares, if they think the price is rising and they can sell them back at a higher price, or they can maintain very little inventory and buy shares only when required to sell to someone else.
The number of market makers for a given stock varies. The minimum is three. There is no max. Larger companies like WCOM, DELL, MSFT may have 50 or more. The more MM's, generally the tighter the spread as there are many firms competing for shares. Notice how spreads on those larger, heavily trades stocks will usually be on the order of 1/16.
For ARET, there are around 12 or 13 MM's I believe. I don't have Level II up now to check. Each individual MM has a bid and ask price. The highest bid and lowest ask (generally two different MM's) make up the "inside" spread. This is what you see in yahoo and such. Consider this:
bid ask
NAWE .025 ALEX .026 the 4 letter abbrev's are just the
PGON .025 CCCC .030 codes for each indiv MM. ALEX= J.
ALEX .025 NAWE .030 Alexander, Inc. I believe...
CCCC .023 MHMY .032
MHMY .022 PGON .035
(I just pulled these out of the air) Anyway, in this example, the inside spread is .025 x .026. Each individual MM has his own spread. NAWE (.025 .030), PGON (.025 .035) etc. But the competition produces a tighter inside spread. You should be able to get some amount of shares at .026 and sell some amount at .025. If you have a large order they may not fill it at either of those prices.
Though there may be 12 or 13 MM's the top few are the only relevant ones if you are looking to make a trade. For example, if you were looking to buy 250k ARET, and wanted to put in a limit order, you would probably have no luck at .026. ALEX, would probably see that large order, take 50K of it, if you allowed partial fills in your order, and then they would move their ask up to .03 or so. The other MM's would see someone wanting a lot of shares and they would jump up as well making you chase it..So I use Level II to help place trades.
Putting a limit order in at .029 will do you no good because after ALEX moves up, there is no one offering to sell to you below .030. You wouldn't know this without L2. While all of these MM's start moving up their ask prices, other people notice, start buying, prices go up further, and you missed your trade....That's what L2 is all about for me...
Again. Notice how ALEX is at .026 on the ask and the next lowest is CCCC at .030. Lots of times, on the threads, you'll hear people moan about how those evil MM's yanked the price up big on a small trade. In this case all it will take is ALEX to drop off the ask and the ask goes up 10%+. Nothing sinister about it, just how the MM's were stacked up at the moment.
Of course MM's are in the business of making money. On large orders or on sudden buying sprees,they are going to start jacking up the ask until resistance is met and then start lowering it back when it dries up. That is why it can be dangerous to place market orders. Especially in fast market conditions. When a flood of market orders come in, the price will spike up and you lose.
I'm rambling and have probably not been too clear. If you have more specific questions, feel free to ask and I'll give it a shot.
mike |
