Market Makers, Spreads & the NYSE

Market makers

• Investors can buy and sell securities in the secondary market largely because of market makers.

“A market maker is a firm that makes a business out of trading securities with the public.”

• Like a car dealership that buys cars and resells them, a market maker buys securities from investors and sells those securities to other investors.
• This chapter explains how market makers use bid and ask spreads and how they operate in two major markets.

Bid & ask spreads

• Bid & ask (offer) spreads are maintained by market makers in the secondary market.
  • 📌 Footnote: “Securities are originally sold in the primary market by issuers, then are traded in the secondary market by investors.”
• The bid and ask are the prices the market maker is willing to trade at.
• 🔑 The difference between them (the spread) is a key source of the market maker’s profit.

🔑 Definitions — bid, ask, spread (word-for-word)

• ⚠️ Both terms are stated from the market maker’s perspective:
  • “The term bid is from the market maker’s perspective: the firm is ‘bidding’ for someone to sell to them.”
  • “The term ask is also from the market maker’s perspective: the firm is ‘asking’ a price in hopes that someone will buy.”
• Along with the bid price, the market maker also states how many shares they’re willing to buy at that price.
• Along with the ask price, the market maker states how many shares they’re willing to sell at that price.

Worked quote example (verbatim)

GM stock

$40 bid / $41 ask

4x7

• In this example, a market maker is quoting GM stock.
• The bid tells us the market maker is willing to buy up to 400 shares at $40.
• The ask tells us the market maker is willing to sell up to 700 shares at $41.
• When a market maker publishes a quote, the size is shown in round lots. The “4” on the bid side means 4 round lots, or 400 shares.

Where profit comes from

• The market maker’s profit comes from buying at the bid and selling at the ask.
• Even small spreads can add up because market makers may execute thousands of trades per day.
• A $1 spread is not common for actively traded stocks. Popular stocks often have spreads measured in pennies.
• In an efficient market, firms can still earn substantial profits because trading volume is high and spreads are small.
• As long as the market maker trades frequently with the public, small spreads can add up over the day.

⚠️ Which side does the customer buy at / sell at?

There are always two sides to a trade. The customer takes the opposite side of the market maker.

NYSE

• Functioning in some form since 1792, the New York Stock Exchange (NYSE) is the world’s largest stock exchange.
• 🔑 The NYSE operates as an auction market, where a designated market maker (DMM) (sometimes called a specialist) facilitates trading in a stock.
• Like other auctions, the DMM (acting like an auctioneer) matches buyers with sellers. The DMM may also trade with the public out of the DMM’s own inventory.
• In any given trade, the DMM can act in an agency or principal capacity.
  • 📌 Footnote: “assume an agency capacity involves matching buyers and sellers, while a principal transaction involves a professional trading directly with their clients.” (These trade capacities are discussed in detail later in this unit.)

How the DMM function actually works

• In practice, the DMM function is both a person on the NYSE floor and a technology-driven trading system.

• Modern markets move too quickly for a human to manually execute every trade, so market making relies heavily on computerized systems and algorithms that respond almost instantly to changing prices and order flow.

• People still oversee these systems and may step in to trade manually when needed.

• Private companies are hired by the NYSE to operate as DMMs, and they assign an employee to work at the DMM post.

• There are several DMMs on the NYSE, but each listed stock is assigned to one DMM. For example, all trades of Coca-Cola stock (listed on the NYSE) are facilitated by one specific DMM.

• 🔑 The DMM’s primary goal is to maintain fair and orderly markets and reduce liquidity problems — the DMM helps ensure investors can trade at accurate market prices during normal trading hours.

Order routing — Super Display Book

• When firms submit customer orders to the NYSE, most orders go through this system and are routed to the DMM for execution.
• ⚠️ “In 2012, the Super Display Book was updated to the modern Universal Trading Platform, but FINRA still refers to the Super Display Book as the NYSE’s system.”

The DMM’s book

• Limit orders that are currently “away from the market” are placed on the NYSE’s order book, known as the DMM’s book.
• 📌 Footnote on limit orders: “Limit orders involve placing a ‘limit’ on a transaction price. For example, a limit order to buy stock at $40 would not allow a transaction to go through unless the stock was $40 or lower. If the market price was above $40, the order would be ‘away from the market’ and remain unfilled until the market price fell below $40.”

Described contents of that screen:

Worked example (verbatim figures):

The last completed trade was 500 shares at $40.25, which sits between the highest bid and the lowest ask.

The best buy order is 100 shares at $40.00. The best sell order is 300 shares at $40.50.

• 🔑 This is the inside market: the best available prices currently on the DMM’s book.

40.00 x 40.50

1 x 3

Agency vs. principal — worked example

• Market orders are often matched against limit orders on the book. (A market order requests execution at the next available price.)

For example, if a market order to buy 300 shares enters the system, it could be matched against the $40.50 limit order to sell 300 shares. In that case, the DMM is acting in an agency capacity by matching:

the buyer (the market order to buy) with the seller (the $40.50 limit order to sell)

If the DMM believes the $0.50 spread (between the highest bid and lowest ask) is too wide, the DMM can step in and fill the market order at a better price than $40.50.

Assume the DMM sells 300 shares from inventory at $40.40. That gives the buyer a $0.10 per share price improvement compared with buying at $40.50. This is a common way DMMs act in a principal capacity: instead of matching orders from the book, they trade directly from their own inventory.

⚠️ When trading as principal, the DMM must avoid competing with public orders. In this example, that means the DMM cannot:

• sell from inventory at $40.50 or higher, or
• buy into inventory at $40.00 or lower

Doing so would mean trading in front of the public orders on the book.

Stopping stock

• 🔑 DMMs are also authorized to stop stock, meaning they can freeze the price of a security for a short period of time.
• This is most often done for floor brokers, who work on the NYSE floor.
• Floor brokers represent financial firms that send trades to the NYSE.

For example, Charles Schwab could send a representative to the NYSE floor to help facilitate large customer trades (while small trades are routinely handled electronically). If Schwab receives a large order in an NYSE-listed stock, the order could be routed to a floor broker. The floor broker may then work with the DMM and other floor brokers to find the best available price.

• If the DMM chooses, the DMM can quote a price to the floor broker and “lock it in” (stop the stock) for a short time. During that time, the floor broker tries to find a better price from other brokers. If no better price is found before the time expires, the broker can return to the DMM and accept the quoted price.
• ⚠️ “DMMs can only stop stock for public orders. They cannot stop stock for themselves or for a firm’s trading account.”

Listing and other exchanges

• The NYSE trades only stocks that are listed on the exchange. To be listed, issuers must meet certain standards (such as market capitalization and minimum numbers of shareholders).
• 📌 “You don’t need to memorize the listing requirements, but it’s important to know that the NYSE generally lists large companies with actively traded stocks.”

Key points

Bid/ask spreads

• Maintained by market makers
• Provide best buy & sell prices

Bid

• Market makers buy at the bid
• Customers sell at the bid

Ask

• Market makers sell at the ask
• Customers buy at the ask

Round lot

• 100 shares of stock

Efficient market

• A large number of market participants
• Small spreads and active trading

New York Stock Exchange

• Auction market
• DMM acts as the NYSE auctioneer
• All trades occur in the first market

Designated market maker (DMM)

• Facilitates trading in NYSE stocks
• May act in an agency or principal capacity

DMM’s book

• Holds limit orders currently away from the market
• Market orders from other investors matched against the book

Floor brokers

• Employees of financial firms operating on the exchange floor
• Obtain the best execution for the firm’s large customer orders

Dual-listed stock

• Listed on a national and regional exchange

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.