Page 58 - THE MARKET WHISPERER
P. 58
56 PART 1 - Allow Me To Introduce You… To The Stock Exchange
Who’s Selling to You?
When you buy or sell a stock, someone is on the other side, selling to you
or buying from you. Who is that person, what’s his or her role, and what’s
guiding him or her?
“Market Makers”
When you want to buy or sell a stock, you need someone with whom to
make that transaction. Have you ever thought about what might happen if
you want to sell, but there’s no buyer? At what price would the sale order
be executed? Can you and several more sellers cause the crash of a stock
because, for a short period, there was no buyer on the other side? Market
makers are the people always willing to fulfill the role of “the other party,”
even if they don’t buy and sell the way you do. The role of market makers
is to constantly stand behind the stock. They set buy and sell orders in
advance, with fixed spreads, and hence, they “make the market” for that
stock.
How do market makers profit? Their profit derives from the spread
(the difference) between the sale and purchase prices. For a company with
a volume of millions of stocks per day, a profit of one cent can amount to
$10,000 per day for every million shares traded. Not a bad income at all!
It’s not always that simple in the market makers’ world. They take no
small amount of risks in that the stock moves in the opposite direction
from the actions they execute. On the NASDAQ exchange, to ensure that
the market will remain competitive and that the spreads set by the market
makers will remain as limited as possible, the stock exchange encourages
activity by a large number of market makers for the same stock. When a
specific stock is being handled by dozens of market makers, the individual
investor is assured of high volume and competitive spreads.
Specialists
Specialists are the NYSE’s version of NASDAQ’s market makers. In contrast
to the NASDAQ, in the NYSE each stock is allocated to only one specialist.
The specialist may be allocated several stocks to trade simultaneously, but
each stock will be traded by only that single specialist.
