Nasdaq Market Maker vs. NYSE Specialist: An Overview

The New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) each employ market makers—dealers or traders whose role is to increase the liquidity of their respective exchanges, provide more fluid and efficient trading, and maintain a fair and orderly market. The goal of facilitating a smooth flow of financial markets is the same for both Nasdaq market makers and NYSE specialists. So, the differences between market makers and specialists have more to do with the characteristics of the exchanges, themselves, than with their basic functions.

Market Makers and Specialists

The NYSE operates with a system of individual securities "specialists" who work on the NYSE trading floor and specialize in facilitating trades of specific stocks. A specialist is simply a type of market maker. In contrast, Nasdaq is an electronic market—basically a computer network—that does not have a trading floor. Instead, Nasdaq relies on multiple market makers—major broker-dealer members of Nasdaq—for actively traded stocks.

A specialist is a type of market maker.

Nasdaq: Market Makers

How Nasdaq works

Nasdaq is comprised of large investment companies that buy and sell securities through an electronic network. Each security on Nasdaq generally has more than one market maker; an average of 14 market makers for each stock provides liquidity and efficient trading. These market makers maintain inventories of stock and buy and sell securities from their own accounts to individual customers and other dealers. Each market maker on Nasdaq is required to give a two-sided quote, meaning they must state a firm bid and ask price that they are willing to honor. Once an order is received from a buyer, the market maker immediately sells off his position of shares, from his own inventory, to complete the order.

Market makers

Market makers are openly competitive and facilitate competitive prices; as a result, investors generally will get the best price. As this competition is evident in the limited spreads, sometimes market makers on Nasdaq will act as catalysts for trades, much like specialists on the NYSE.

Making a market—why it's important

"Making a market" signals a willingness to buy and sell the securities of a defined set of companies to broker-dealer member firms of that exchange. In short, market making facilitates a smooth flow of financial markets by helping investors and traders to buy and sell. Without market making, there might be insufficient transactions and less overall investment activity.

NYSE: Specialists

Because the NYSE is traded in person and Nasdaq is electronic, specialists have more duties than do Nasdaq market makers, both in breadth and in volume. Specialists working on the NYSE must fulfill the following functions to ensure a fair and orderly market:

Auctioneer 

Because the NYSE is an auction market, bids and asks are competitively forwarded by investors. The specialist posts these bids and asks for the entire market to see; ensures that they are reported in an accurate and timely manner; the best price is always maintained; all marketable trades are executed, and that order is maintained on the floor. The specialist must also set the opening price for the stock each morning; which can differ from the previous day's closing price based on after-hours news and events. The specialist determines the correct market price based on supply and demand.

Agent

The specialist can also accept limit orders relayed by investors through brokers or electronic trading. The specialist must ensure that the order is transacted appropriately on behalf of others, using the same fiduciary care as the brokers themselves, once the price of the stock has reached the limit criteria.

Catalyst

Because the specialists are in direct contact with the bidders and sellers of particular securities, they must ensure that enough interest exists for a particular stock. In cases where the bids and asks can't be matched, the specialist must seek out recently active investors. This aspect of the specialist's job helps to induce trades that may not have happened if the specialist had not been there to bring buyers and sellers together.

Principal

If there is a demand-supply imbalance in a particular security, the market maker must act as "principal" by making adjustments—buying and selling from his or her own inventory—to equalize the market. If the market is in a buying frenzy, the specialist will provide shares until the price is stabilized. A specialist will also buy shares for her inventory in the event of a large selloff.

Key Takeaways

  • Both market makers and specialists help to maintain a fair and orderly market on a securities trading exchange.
  • Nasdaq is a computer trading network that relies on multiple market makers—broker-dealers who are members of that exchange.
  • A specialist is a type of market maker who works on the floor of the NYSE and specializes in trading specific stocks.