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.
  • 📌 Issuers sell new securities in the primary market; after that, investors trade them with each other in the secondary market.
• 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

ABC stock

$62 bid / $63 ask

5x2

• Here a market maker is quoting ABC stock.
• The bid means the market maker will buy up to 500 shares at $62.
• The ask means the market maker will sell up to 200 shares at $63.
• Quote sizes are shown in round lots. The “5” on the bid side is 5 round lots, or 500 shares, and the “2” on the ask side is 200 shares.
• The spread is $1 ($63 − $62).

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.
  • 📌 In an agency trade the firm matches a buyer with a seller. In a principal trade it buys from or sells to the client out of its own account. See agency vs. principal capacity.

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.
• 📌 A limit order sets a price boundary. A buy limit at $62 can fill only at $62 or lower. While the stock trades above $62, the order is “away from the market” and waits until the price comes down to its limit.

Described contents of that screen:

Worked example (figures from the diagram above):

The last completed trade was 600 shares at $62.40, which sits between the highest bid and the lowest ask.

The best buy order is 200 shares at $62.10. The best sell order is 400 shares at $62.70.

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

62.10 x 62.70

2 x 4

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 400 shares enters the system, it could be matched against the $62.70 limit order to sell 400 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 $62.70 limit order to sell)

If the DMM believes the $0.60 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 $62.70.

Assume the DMM sells 400 shares from inventory at $62.55. That gives the buyer a $0.15 per share price improvement compared with buying at $62.70. 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 $62.70 or higher, or
• buy into inventory at $62.10 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 on this page. Every link was fetched and returned HTTP 200 on 2026-08-15.