In the absence of public orders the specialist / DMM is required to provide liquidity and price improvement for the stocks in which they are assigned. DMMs are required to trade against the market in the absence of public orders. However, the DMM may now also trade for their own account at prices that would compete with public orders.

Example:

If the public market for XYZ is quoted as follows:

Bid Offer
10 X 10 20.45 20.55

There is a 20.45 bid for 1000 shares and 1000 shares offered at 20.55

If a public sell order came in to sell the stock, the DMM could purchase the stock for their own account at 20.45 because they are on parity with the public. The DMM could also purchase the stock for their own account at 20.50 and would be improving the price that the seller would be receiving. This is known as price improvement. Alternatively, if a public buy order came in, the specialist / DMM could sell the stock from their own account at 20.55, because they are now allowed to compete with the public. They could also sell the stock to the customer at 20.50 because, once again, that would be providing price improvement for the order.



The Specialist / DMM Acting As An Agent

Related Articles
  1. Investing

    The Auction Method: How NYSE Stock Prices are Set

    The New York Stock Exchange (NYSE), sometimes referred to as “the big board,” is the oldest and largest stock exchange in the United States. NYSE is the place investors think of when ...
  2. Trading

    Know Your Counterparty When Day Trading

    This can provide insight into how the market is likely to act based on your presence, orders and transactions.
  3. Investing

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  4. Personal Finance

    E-Marketing Specialist: Career Path & Qualifications

    Learn more about the duties and responsibilities performed by eMarketing specialists and common career paths this profession takes.
  5. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  6. Investing

    Making The Trade: Understand Order Types

    Buying and selling stock can be a lot like buying or selling a car. Traders should use and understand tools such as market orders, limit orders, day orders, and good-'til-canceled orders to ensure ...
  7. Insurance

    The Ups And Downs Of Initial Public Offerings

    Initial public offerings aren't the best option for every company. Consider these factors before "going public."
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center