» Stock Investing Basics » Market Makers Role and Responsibilities

Market Maker’s Role and Responsibilities

The role of the market maker is clearly identified in the NASDAQ. The latter represents a computer-based stock exchange. It allows for the electronic interaction of buyers and sellers. The NASDAQ has no physical trading floor.

On the other hand, such stock exchanges as the New York Stock Exchange (NYSE) and several other smaller ones are not deprived of their physical locations. In the NYSE the prices of the stocks are set by the orders, which further characterizes it as an auction market. Having received the orders, a specialist forms the prices of the stocks.

On the other hand, the NASDAQ can be characterized as a negotiated market. This means that the computer systems present the prices that have been offered by buyers and sellers. The first price to be filled is the best one. So, it is generally recommended that you give the best price if you really want to sell a stock.

As it was mentioned above, a major role in the activities of NASDAQ is played by the market maker. In order to qualify for a market maker, the company should register with the SEC. Its responsibility is to make a market in a particular security. 

Market makers at NASDAQ execute their tasks through a computer network. They lack the physical floor as in the NYSE.

The major responsibilities of market makers include the filling of orders on behalf of the customer. They also fill orders for their own account. Market makers also benefit from the difference between the ask and the bid prices, in terms of acting as a dealer.

Market makers are required to post a price at which they are willing and able to buy and sell. These prices are commonly referred to as bid and ask prices. After the market maker has specified these prices, they are transferred to NASDAQ's computer system together with the orders of the customers. After this the system makes a rating of the orders.

The first prices to be filled are the ones that are rated as the best. They appear at the top of the list. The advantage of such a computer-based system is that the ranking of orders and their filling is done at a higher speed than other human participating systems.

The actual ranking and filling of prices and orders is not seen by the investor. However, the Level II NASDAQ does provide this capability. It also provides tons of information about the orders that are being processed.

Level II NASDAQ is most often used by day traders, swing traders and other traders who execute frequent trades. If you are one of them Level II NASDAQ will cost you approximately $300 per month or even more. The price is determined by the options you have selected. The Level II Screens can be obtained from a number of vendors.

Finally, market makers at NASDAQ are responsible for the provision of a market for the listed securities and the provided prices (both ask and bid prices). The best prices are the ones that appear first. This greatly facilitates the receiving of the most beneficial for the time price by the investor, no matter what type of transaction s/he is executing (buying or selling). However, it is important to remember that the market maker is not responsible for the provision of the price that you consider is the most beneficial.

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