Q1: 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? A1: a. What role do market makers play in the trading system? The market makers play an important role in the trading system as catalysts, particularly for enhancing stock liquidity and, therefore, for promoting long-term growth in the market. In detail, they played two roles as below: 1) They act as brokers handling the limit order book, where limit and stop order are maintained. 2) They act as dealers by buying and selling stocks for their own accounts to maintain an orderly market and provide liquidity to the market if there is an inadequate order flow. b. How do they make profit from this role?
A market maker makes money by buying stock at a lower price than the price at which they sell it, or selling the stock at a higher price than they buy it back. Ordinarily they can make money in either rising or falling markets, by taking advantage of the difference between "bid" and "offer" prices. c. How do the market makers compete with one another?
1) Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from his own inventory or seeks an offsetting order. 2) Market makers also compete against each other to post the best prices, and the prices they offer which are available, in real time, to subscribers.
Q2: How does the NASDAQ quoting convention work?
A2: The quoting conversion in NASDAQ is known as the common understanding of the manner that bid-ask prices of the stock which established by different market makers displayed in NASDAQ. Bid or ask quotes must be multiples of $1/8 if the bid price exceeds $10. Under this quoting convention, market makers use odd-eighths fractions in their bid-ask prices if the market spread of the stock is less than...