The Market Maker - Providing Liquidity For Stock Exchanges
Have you ever wondered how you can buy and sell shares so quickly in the stock market
? When you place a buy order with your broker, there has to be a seller in order for you to get the shares. So if there are no sellers, then how do you get your shares? This is where the market maker steps in and sells his shares to you. Market makers accumulate an inventory of shares and sell them when there are no sellers. People often refer to these market makers as MM's.
Each stock exchange is going to have different market makers and some are designated to a certain stock. The NASDAQ Stock Exchange has many MM's that are providing liquidity to the market. While the New York Stock Exchange has designated MM's to each specific stock, they are known as specialists and they have to provide liquidity in the market. A major difference between a market maker on the NASDAQ and on the NYSE is that a specialist on the NYSE has face-to-face action with traders. This is because the New York Stock Exchange is an auction based exchange that has traders on the floor to interact with the specialists and it also is an electronic exchange while the NASDAQ is only an electronic exchange. When you get into the penny stock world, such as Pinksheet stocks and OTCBB stocks, there are many MM's that are providing liquidity for the stocks.
Every MM is going to have a four letter symbol that they trade with. A popular market maker in penny stocks would be Knight Equity Markets which is symbol NITE. Market makers that trade on the NASDAQ or OTCBB would be large investment companies and they are not actually at the exchanges because there are no exchange floors, they are just trading electronically.
You are probably wondering by now, how do the market makers make any money for themselves?
They make money by scraping change off the spread of the bid/ask price that they are maintaining. Let say that they bought shares at 20.30 a share, he then turns around and sells the shares at 20.31 and takes the minuscule profit for himself. But they can trade millions of shares a day, so these small profit add up to quite a bit at the end of the trading day.