Through Their Eyes
A Market Maker's Perspective
by Don Bright
Here's an eye-opening look at the market maker's role and the pros and cons of this system in light of today's increasingly electronic marketplace.
When you place an order to buy a stock, what happens between the time you place your order and the time it is executed? You might think you have complete control over your trading decisions, but within that short period of time your order is in the hands of market makers - and the control is out of your hands. Knowing what they do and how they operate can have a significant effect on your trading.
TYPES OF MARKET MAKERS
There's a major distinction between the two most common interpretations of the term "market maker," and it's important to know the differences. The main market maker on the floor of an options exchange for a particular stock is called a "Designated Primary Market Maker" (DPM). This person is required to provide a fair market price (and thus liquidity) in the stock options traded. These traders can improve markets in many different securities, as desired, but must at minimum make a fair market in their designated stocks. There are specific guidelines as to the bid/offer "spread" and minimum trade size reflected when asked.
FIGURE 1: NASDAQ market in action. On this Level II screen a specific ID identifies each market maker.
...Continued in the March 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US.
Excerpted from an article originally published in the March 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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