1. Money

Market Makers Keep Nasdaq Humming

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The Nasdaq is a computer-based stock exchange where buyers and sellers meet electronically. Even though computers keep track of all the orders, there is still a very human presence in the Nasdaq and that is the market maker.

Unlike the New York Stock Exchange and some other smaller exchanges, there is no physical Nasdaq trading floor.

However, that’s not the only difference between the Nasdaq and the NYSE. The other major difference is that the NYSE is an auction market where orders set the prices. A specialist in each stock determines the price based on the orders.

The Nasdaq, on the other hand is a negotiated market where the computer network posts prices from different buyers and sellers. The best prices get filled first. If you want to sell your stock, you’ll need to post the best price.

The Market Maker

The market maker is an investment company that registers with the SEC to buy and sell a particular stock on the Nasdaq.

Unlike their counterparts at the NYSE, the market makers work through a computer network rather than on the floor of a physical exchange.

Their job is, literally, to make a market in a particular security. Here is what they do:

  • They fill orders for their company’s customers and for their own account
  • They also act as dealers to profit from the difference between the bid and ask price for the stock
The Nasdaq requires market markers to provide a “two-sided quote” in the securities they cover.

Buy and Sell

This means they must post a price they will buy at and a price they will sell at (a bid and ask price – see my article on “bid and ask” prices for more information). These prices along with customer orders go into the Nasdaq computer system and the system ranks the orders.

The best prices to buy and the best prices to sell automatically go to the top of the queue and the computer fills them first. The difference is the computer moves orders and prices through the system faster than any human ever could.

Unless you have access to an information provider that offers Level II Nasdaq screens, you will never see this process at work. Level II screens reveal the process of ranking prices and a tremendous amount of information about orders.

Level II Screens

You can buy access to Level II screens from a number of vendors; however, it could cost up to $300 per month or more depending on what options you choose.

Day traders, swing traders and others who trade on very tight margins need this type of information. Most other investors do not.

Conclusion

The important thing to remember is that the market maker on the Nasdaq is responsible insuring a market is available for listed securities by posting a bid and ask price.

The Nasdaq system posts the best prices first and fills orders in this ranking. This process guarantees investors the best possible price at that moment, whether they are buying or selling. The market maker assures that there will be a market for the security; however, they don’t guarantee it will be at the price you want.

Other Articles in This Series

Trading Basics

How Stock Prices Are Set

Buying High, Selling Low

Understanding Stock Quotes

Understanding Bid & Ask Prices

Understanding Stock Orders

Using Trailing Stops to Protect Stock Profits

Understanding Stop Loss Orders

Market Specialists Make NYSE Work

Market Makers Keep Nasdaq Humming

Don't be a Victim of Trading Scams

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