How do market makers function on NASDAQ?

Market makers play a crucial role in NASDAQ’s trading system by providing liquidity and facilitating the buying and selling of securities. Here’s how they function:

• Role and Responsibilities: Market makers are firms or individuals that commit to buying and selling specific stocks at quoted prices. They provide liquidity to the market by continuously offering to buy or sell shares, which helps maintain an orderly and efficient market.
• Quoted Prices: Market makers quote prices at which they are willing to buy and sell stocks. These quotes include the bid price (the price at which they are willing to buy) and the ask price (the price at which they are willing to sell). The difference between the bid and ask prices is known as the bid-ask spread.
• Liquidity Provision: By continuously quoting prices and executing trades, market makers ensure that there is a ready market for investors to buy and sell securities. Their activities help reduce the cost of trading and improve market liquidity.
• Competition: NASDAQ’s dealer network model encourages competition among market makers. Multiple market makers may quote prices for the same stock, which helps narrow the bid-ask spread and benefits investors by providing better pricing.
• Regulatory Requirements: Market makers must adhere to regulatory requirements and maintain certain standards of performance. They are required to fulfill their quoting obligations and provide liquidity even during periods of market volatility.

Market makers are essential to NASDAQ’s electronic trading system, helping to ensure market liquidity and efficient price discovery. Their activities support a smooth and orderly trading environment for investors.