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Finance Dictionary and Glossary of Investment Terms
Market Maker
Definition 1.
On the Nasdaq system a broker-dealer that is willing to accept the risk of holding a particular number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks the other side of the trade until it is executed. This process takes place in mere seconds.
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Definition 2.
Used in the context of general equities. One who maintains firm bid and offer prices in a given security by standing ready to buy or sell round lots at publicly quoted prices. See: Agent, dealer, and specialist.
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Definition 3.
A brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintaining liquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be an incentive for brokers to recommend securities simply because the firm makes a market in that security.
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Definition 4.
The individuals or firms who maintain the best bid and ask prices on the option floors of the Chicago Board of Exchange and Pacific Stock Exchange. Market makers can compete with each other on the same underlying security''s option pricing to provide the best bid and asked prices at any time.
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Definition 5.
A firm that maintains a firm bid and offer price in a given security by standing ready to buy or sell at publicly-quoted prices. The Nasdaq Stock Market is a decentralized network of competitive Market Makers. Market Makers process orders for their own customers, and for other NASD broker/dealers; all NASD securities are traded through Market Maker firms. Market Makers also will buy securities from issuers for resale to customers or other broker/dealers. About 10 percent of NASD firms are Market Makers; a broker/dealer may become a Market Maker if the firm meets capitalization standards set down by NASD.
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