Case Study Nasdaq

Topics: NASDAQ, Market maker, Financial markets Pages: 3 (896 words) Published: March 6, 2011
1. What role do market makers play in the trading system? How do they profit from this role? How do the market makers compete with one another?

2.1. A major role in the activities of NASDAQ is played by the market maker. Market makers at NASDAQ execute their tasks through a computer network. The major responsibilities of market makers include the filling of orders on behalf of the customer. They also fill orders for their own account. Market makers also benefit from the difference between the ask and the bid prices, in terms of acting as a dealer. Market makers at NASDAQ are responsible for the provision of a market for the listed securities and the provided prices (both ask and bid prices)

2.2. Profits:
* making money from the differences in bid and ask prices: Because each market maker can either buy or sell a stock at any given time, the spread represents the market maker's profit on each trade * receive a commission: Their first priority is to provide liquidity to their own firm's clients * They may also facilitate trading for other brokerage firms, which is very similar to the duties of a specialist. * The major risk for the market maker is the time lapse between the two transactions; the faster he or she can make the spread the more money the market maker has the potential to make 2.3. In the market maker system, market makers compete with one another to buy or sell stocks & options to investors by displaying quotes and are obligated to buy and sell at their displayed bids and offers. An investor may be dealing with several market makers at once if that investor is placing a very large order which cannot be filled by the inventory of one market maker.

2. How does the NASDAQ quoting convention work?

The NASDAQ quoting convention required market makers to update the prices they quoted to buy and sell Nasdaq stocks on the Nasdaq screen by a quarter (25 cents) rather than an eighth (12« cents), whenever their...
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