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Wednesday, March 14, 2007

What is a Market Maker?

A market maker is a broker dealer or bank, who is always ready to buy and sell stocks from and to traders respectively. By doing so they make the market alive for all traders; other wise you have to find a buyer yourself if you want to sell a stock. Although the role of market marker is to increase the liquidity of every market, their practices may differ with various markets.

NYSE and AMEX have only of market maker, the specialist, who is granted with many special trading advantages. NASDAQ have over 500 market makers obligated to buy and sell, who usually does not have any trading advantages but are permitted to sell without a burrow (naked shorting). In over-the-counter (OTC) markets the importance of market makers are the highest, as they are primarily responsible for trading of stocks. Unlike other market markets OTC market makers negotiate stock price with traders or their brokers, and ensures their profit. There may be more than one OTC market maker trading the same stock.

The profit of market makers, other than OTC market markers, comes from very small spread between ask and bid prices. The price differences may be very minute, but transacting large numbers of securities, they manage to profit reasonably.

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