Trading Securities - The Specialist / DMM Acting As An Agent

The specialist / DMM is also required to execute orders that have been left with them. Orders that have been left with the DMM for execution are said to be “left or dropped on the book”. The DMM is required to maintain a book of public orders and to execute them when market conditions permit. The types of orders that may be left with the specialist are:

  • Buy and Sell limit orders
  • Stop orders
  • Stop Limit orders
  • Both day and GTC orders
  • AON orders

The DMM will execute the orders if and when they are able to and will send a commission bill to the member who left the order with them for execution. This is known as a specialist bill and is usually only a cent or two per share. The DMM is also required to quote the best market for the security to any party that asks. The best or inside market is comprised of the highest bid and lowest offer. This is made up from bids and offers contained in the DMM’s book and in the trading crowd. The inside market is also the market that is displayed to broker dealers and agents on their quote system.

When quoting the inside market the DMM will add all of the shares bid for at the highest price and all of the shares offered at the lowest price to determine the size of the market. There are certain types of orders that are not included when determining the inside market they are:

  • Stop orders
  • All or None orders

A DMM may not accept the following types of orders:

  • Market orders
  • Immediately executable limit orders
  • Not held orders
  • Immediate or cancel orders
  • Fill or kill orders

Market orders and immediately executable limit orders are filled as soon as they reach the crowd so there is nothing to leave with the specialist. In the case of a not held order, once a floor broker is given discretion as to time and price, they may not give it to another party.

A DMM’s book may look something like the following example:

Buy XYZ Sell
5 Goldman 10 JPM 20

1 Prudential

5 Fidelity

20.15 2 Morgan
5 Merrill Stp 20.20

The inside market for XYZ based on the specialist’s '00 V book would be:

Bid Ask
15 X 6 20.00 20.10

Buyers are bidding for 1500 shares and sellers are offering 600 shares of XYZ.

Note: The buy stop entered over the market by Merrill is not contained in the quote, as the order has not been elected.

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