If the stock you want to buy or sell is listed
on the NASDAQ Stock Market, your broker may send the order to
a NASDAQ market maker.
What's distinctive about a market maker
is that the firm commits itself to trade by quoting a specific
price for 100 shares of stock and is ready to execute an order
at that price or better. In fact, when a transaction occurs, the
market maker actually owns the stock for the period between the
sale and the purchase. That period might be as brief as a few
seconds or as long as overnight, depending on the time the purchase
is made.
When
there are a number of market makers in the same stock — 10
is average, and some stocks have more than 50 — the price
competition can be quite intense. In contrast, there may be less
competitive bidding in unlisted stocks that are traded over the
counter (OTC) rather than on NASDAQ or one of the exchanges. Fewer
firms make a market in these stocks, demand is often more erratic,
and trading may be thin, or infrequent.
There are market makers in exchange-listed
stocks as well. They operate in the same way as NASDAQ market
makers, but are referred to as third market makers. That may be
to indicate they are a further step removed from the secondary
market, which is the exchange floor.
A range of prices
If your order is for
200, 300, or 1,000 shares rather than 100, you may
actually pay different prices for every 100 shares
if your order goes through a market maker — though
your confirmation will give the average price per
share. That's because each market-maker quote
governs a minimum of 100 shares, and larger orders
may be filled with a series of transactions. Large
orders can also be quoted and filled in larger lots.
For example, if an order for 20,000 shares is filled,
it may be filled in 1,000 or 5,000 share lots.
