Day Trading Guide – Chapter 8: Market makers

In addition to Electronic Communication Network (ECN), market makers are institutions which appear on level II access. These market makers can be regarded as those professional traders working with financial institutions like Merrill Lynch and Goldman Sachs. They are in essence a broker or dealer firm that deal with holding a specific quantity of shares of a particular asset to help trading in that asset. Every market maker actually competes for order flow with their “buy” and “sell” quotations for a guaranteed quantity of shares. When they have an order, they will fill the order from their own inventory or look for an offsetting order. The whole process of concluding the transaction normally takes seconds.

Because of their volume trading ability especially for NASDAQ stocks, they are accorded special privileges by the National Association Of Securities Dealers (NASD).

Although the convention is that every brokerage is to try to obtain the best possible price for their clients, the reality is that most of the online brokerages divert their bulk of their orders to a specific market maker that offers them rebates for “order flow”. Traders in this case have no alternative to this sort of arrangement between the brokerages and the market maker. This is the main disadvantages of traders who have no direct access trading system.

Level II Access

Level II which is the next rung up from Level I access means gives access to the quotes of individual Nasdaq listed securities to market makers as well as offering and bidding lots. Traders with this access can see the name of the market maker and to identify their offering patters. You can get access to Level II over the internet but it is quite expensive- hundreds of dollars a month.

Level III

Level III again is a step up from both Level I and Level II. With this level in addition to the access you receive from the other Levels you can also execute and send orders. Only Nasdaq member companies can have access. It is the quickest way to carry out a trade and will commonly be seen on the trading floors of brokerage firms.