Series 24: Market Makers

Market Makers

Dealers are also called market makers. Because they assume the risk of buying or selling out of their own account at posted bid and ask prices, they are creating a market for that security. All NASDAQ and over-the-counter securities are traded through market makers, who provide liquidity and price discovery for buyers and sellers of that security.

Multiple market makers offer price competition and create a market for the second market. For the first market, every security has a single market maker on any given exchange. Securities dealers on the exchange floor are called Designated Market Makers (DMMs). Each listed stock is assigned a DMM by the exchange to facilitate the auction market for that security. DMMs execute principal transactions.

Recently, the NYSE has adopted a multi-dealer structure, in which DMMs must compete for business with a new class of market maker, called a Supplemental Liquidity Provider (SLP). SLPs must trade from offices outside the Exchange using computers, with the purpose of providing greater liquidity to the exchange market.

The only time a non–market maker may execute a principal transaction in the OTC market is if it is a riskless principal transaction. A riskless principal transaction is when a non–market maker receives an order from a customer and then buys stock from a market maker to fill the order, but instead of immediately delivering the stock to the client, he or she puts it into a riskless principal account. The non–market maker then