NASDAQ Market Makers
Market Makers are securities firms that use their own capital to buy and maintain an inventory in a specific company's stock. When a Market Maker receives an investor's order to buy shares in a particular stock, it sells those shares to the customer from its existing inventory. If necessary, it will buy enough shares from other Market Makers to complete the sale.
Before committing capital to a market-making position in a stock, a typical firm will create a stock selection committee. The committee usually includes representatives from research, trading, and sales. The analyst assesses a stock objectively, for its intrinsic investment merit; the trader provides information as to the availability or liquidity of the issue, and also with respect to the quality and the depth of commitment of other firms already making a market in the stock; and the sales staff offer their judgments as to whether the issue will appeal to the individual and institutional customers of the firm.
Market-making firms must be members of the National Association of Securities Dealers, Inc. (NASD®). As Market Makers, firms must meet special capital requirements related to the number of securities in which they make markets. Market Makers cannot withdraw from a security without permission from The NASDAQ Stock MarketSM, which is granted only for very restricted regulatory reasons. If a Market Maker withdraws without permission, it is barred for 20 days from resuming trading the security. These requirements provide depth and continuity of support to NASDAQ® stocks.
While Market Makers must register to "make a market" in (buy or sell) a specific company's stock, there is no limit on the number of Market Makers that can represent the stock of a single company. In fact, some of NASDAQ’s largest companies have more than 60 Market Makers, and there are, on average, 11 Market Makers for every NASDAQ-listed security.
These Market Makers include the world's largest and best-capitalized securities firms. Today, about 550 broker/dealer firms make markets in NASDAQ-listed securities. In addition to large, full-service firms with offices throughout the world, Market Makers also include regional firms making 200 to 400 markets each; firms with specialty areas such as banking, insurance, and high technology; local firms making markets in the stocks of companies within their areas; and wholesalers, making markets in as many as 4,500 securities, primarily to serve non-market-making brokerage firms and financial institutions.
The NASDAQ Stock Market is unique in its open, displayed competition between Market Makers. State-of-the-art technology also enables Market Makers to recognize and react to the constantly changing prices that result from the purchase and sale of securities. New Order Handling Rules allow customers' limit orders to affect the price and size of quotes displayed by Market Makers. The rules also require that the best Market Maker orders shown on private trading systems must also be displayed in the public quote.
The best quotations in NASDAQ’s issues are displayed to investors continually through nearly 350,000 terminals in 60 countries.
To qualify as a Market Maker, a broker/dealer is subject to stringent rules and regulations, the most important being:
? Guaranteed execution of each order at the best price available.
? Commitment to buy and sell the securities in which they make markets.
? Agreement to report publicly the price and volume of each transaction within 90 seconds
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