Market makers are exchange member firms composed of individual dealers that commit firm capital to compete for order flow in particular stocks. These firms conduct two types of trades. They buy and sell securities for customer accounts (referred to as agency trades) and for their own firm accounts (referred to a principal trades). While brokers facilitate trade orders from buyers and sellers, market makers actually execute/fill them. Market makers can deal directly from their inventory, bundle client orders and/or arbitrage spreads to generate profits. Originally created for the NASDAQ stock exchange, market makers also co-exist on listed exchanges including the NYSE and AMEX as third-party market makers competing with each other and specialists.
Market makers are mandated to be willing buyers and sellers at the national best bid offer (NBBO) for stocks they make a market in. They are obligated to post and honor their bid and ask (two-sided) quotes in their registered stocks.
Wholesalers trade shares for institutional clients and various broker-dealers not registered as market makers in particular stocks. Wholesalers deal in large volume pools often utilizing high frequency trading programs to optimize bundling and spread arbitrage strategies. These firms are also notorious for order flow arrangements compensating brokerages that direct customer orders to them.
Large retail brokers tend to use inhouse market makers as well as clear their own trades. Broker-dealers with institutional clientele like Goldman Sachs, JPMorgan and Morgan Stanley specialize in institutional market making as well as retail client orders. Wholesalers have order flow arrangements with various broker-dealers as well as fintech trading apps. Some of the largest wholesalers include G1 Executions Services, Apex Clearing Corporation, Citadel Securities, Virtu Financial and Two Sigma Securities.
Electronic communications networks (ECNs) are the primary competitors to market makers. These electronic limit books and alternate trading systems (ATS) enable traders to take control of their executions with direct order routing. The competition with ECNs is one of the key reasons that wholesalers arrange order flow agreements to incentivize retail brokers to send their customer orders. This is especially rampant with zero-commission trading apps.
Be conscious of misdirection whether from traders or market makers. Be aware of late prints as well as hidden and iceberg orders on time and sales. When you see just 100 shares offered on the inside ask but time and sales prints over 10,000 shares executed at that price, it tells you there is a heavy hidden seller. The faster you spot this, the quicker you can avoid or trade the fade as participants panic out. While spoofing is illegal, it can still be present in thinner traded stocks where level 2 shows a lot of activity but actual trades on time and sales is minimal. Be careful not to chase these stocks, but rather use hidden or iceberg orders to enter on pullbacks.
If you've ever traded stocks, you've probably used a market maker. Market makers are the middlemen of the stock market, and in most cases, these are firms, individuals, and or large corporations that facilitate transactions. For example, if you wanted to buy shares... 2b1af7f3a8