Series 65: 7.1.1.1 Auction Market

Taken from our Series 65 Online Guide

7.1.1.1  Auction Market

In an auction market, also called the first market, securities are traded on an exchange floor. It is an auction market because brokers gather around a trading post where a Designated Market Maker (DMM), formerly known as a specialist, acts as auctioneer and allows supply and demand to determine the price of the security. Each listed stock is assigned a DMM by the exchange to facilitate the auction market for that security. The DMM is also responsible for posting quotes in a security. A quote consists of the highest bid and the lowest offer price. An order becomes a quote when the DMM or floor broker communicates the order to the crowd. As auctioneers, the DMMs must promptly report quote information for the securities they manage, and they must ensure that trades occur at prices no worse than the disseminated quotes. Orders reported electronically must be reported as soon as practicable following their receipt.

The DMM is responsible for making sure trading moves in a fair and orderly fashion. Fair means that no individual or organization is favored. Orderly means there is a continuous market (active buyers and sellers) for the designated security. A fair and orderly market also means there are not large variations in the price of a security from one transaction to the next.

Market 1: WMT: 54.08, 54.10, 54.09, 54.10, 54.11, 54.13, 54.10

Market 2: WMT: 54.08, 54.10, 54.15, 54.12, 54.16, 54.12, 54.20

Above, the first market is an example of a fairer and more orderly market, because there is less variation in the price of the security (WMT is the ticker symbol for Walmart).

As the market makers on the exchange, DMMs often buy and sell for their own accounts to maintain price continuity and minimize price volatility. Th

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