Market makers facilitate trading by buying and selling shares, profiting from the difference between the bid and ask price. They compete with each other to ensure a fair market, and the right to be a market maker is valuable. The NYSE has similar traders called market experts.
A market maker is a special type of broker whose job it is to “make” the market for a particular stock. The market maker will either keep a certain number of shares in his inventory with the express purpose of being able to sell them to the person who bids to buy them, or he will increase his inventory by buying shares from a seller offering shares. In some cases, the market maker may just match the buyer and seller of the shares.
A market maker does not charge a commission for selling, but profits from the difference between the bid and ask price. The potential seller of the shares sets the price at which the share will be sold; this is the asking or asking price. The potential buyer of the stock will bid or offer a price at which the stock will be purchased. These two prices are rarely the same, and the market maker will only trade when there is enough difference to make a profit on the sale. In heavily traded stocks, where hundreds of thousands of shares are traded in a single day, the market maker can still make a sizable profit, even if that difference is very small.
The NASDAQ market is made up of over 300 market makers. Since a market maker makes a profit on every sale, whether the market goes up or down, the right to be a market maker in a market like the NASDAQ is worth a lot of money. The opportunity to become a market maker is very rare, and usually a given. It is not possible to simply decide to become a market maker and start a business as such.
To ensure an efficient and effective market, there are an average of 14 market makers per share on the NASDAQ exchange. Each market maker competes with the other market makers for each proposed stock trade. The intention is that, in this way, the market remains competitive and fair for all involved. The New York Stock Exchange has dealers who perform similar functions. However, on the New York Stock Exchange, these traders are referred to as market experts and not market makers, even though they serve exactly the same purpose.
Asset Smart.
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