The Securities Marketplace - Stopping Stock

A DMM, as a courtesy to a public customer, may guarantee an execution price while trying to find an improved or better price for the public customer. This is known as “stopping stock”

Example:

An order comes in to the crowd to purchase 500 ABC at the market when ABC is quoted as follows:

Bid

Ask

15 X 20

40

40.20

If the DMM stopped the customer, they would guarantee that the customer would pay no more than 40.20 for the 500 shares. The DMM would then try to obtain a better price for the customer and try to attract a seller by displaying a higher bid for that customer’s order. ABC may now be quoted after the specialist stopped the stock as:

Bid

Ask

5 X 20

40.10

40.20

In this case the DMM is trying to buy the stock for the customer 10 cents cheaper than the current best offer. If, however, a buyer comes into the crowd and purchases all of the stock that is offered at 40.20, the specialist must sell the customer 500 shares from their own account no higher than 40.20.

Short Sales


Related Articles
  1. Investing Basics

    Designated Market Maker

    A designated market maker maintains fair and orderly markets for an assigned set of listed firms and improves market liquidity.
  2. Active Trading Fundamentals

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  3. Economics

    How to Calculate Sustainable Growth Rate

    Sustainable growth rate is the rate at which a company can grow without having to borrow money to fund its growth.
  4. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  5. Economics

    Understanding Marketing

    Marketing includes all of the activities of a company associated with buying and selling a product or service.
  6. Stock Analysis

    Retail Returns Spell Disaster For Investors

    Retailers can do a terrible job handling returns and exchanges. We look at how this can affect investors.
  7. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  8. Economics

    How Can Companies Increase Market Share?

    Companies that increase their market share enjoy a competitive advantage. They receive better prices from suppliers, and they’re able to produce goods faster.
  9. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  10. Term

    Three Ways to Profit Using Call Options

    A call option gives an investor the right, but not the obligation, to buy a stock at a specific price, known as the strike price.
RELATED TERMS
  1. Trading Ahead

    When a specialist trades securities for his or her own firm's ...
  2. Mass Customization

    The process of delivering wide-market goods and services that ...
  3. Specialist Short Sale Ratio

    A ratio used to determine the sentiment of specialists on the ...
  4. Best Bid

    The highest quoted bid for a particular trading instrument among ...
  5. Negative Verification

    A system of confirming that a bank's records agree with a customer's ...
  6. Order Driven Market

    A financial market where all buyers and sellers display the prices ...
RELATED FAQS
  1. Is good customer service something to look for in a company in which I am considering ...

    Learn about the importance of customer service when deciding whether to invest in a stock. Good customer service can ensure ... Read Answer >>
  2. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Answer >>
  3. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
  4. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
  5. What is the difference between a quote driven market and an order driven one?

    The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask ... Read Answer >>
  6. If I buy a stock at $45 and I put a stop limit in to sell at $40, will I be guaranteed ...

    Not necessarily. This is, unfortunately, one of the problems with orders. If a stop order is established, it means that the ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center