The DMM Acting as a Principal

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

Example:

If the public market for XYZ is quoted as follows:

Size

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 DMM ACTING AS AN AGENT

Related Articles
  1. Trading

    Why limit orders may cost more than market orders

    Learn the difference between a market order and a limit order, and why a trader placing a limit order sometimes pays higher fees than a trader placing a market order.
  2. Investing

    Post-IPO Pricing

    Once a stock IPOs, a predictable series of liquidity events can strike in the first quarter.
  3. Investing

    Understanding Market Orders And Limit Orders

    A market order executes a transaction as quickly as possible at the present price. Immediacy is the main concern. A limit order is executed at or below a purchase or sale price. Price is the ...
  4. Personal Finance

    How brokers can avoid a market-maker's tricks

    Ensure that you and your clients are getting the best deal by avoiding these three pitfalls.
  5. Trading

    Understanding order execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  6. Insights

    The Ups and Downs of Initial Public Offerings

    Learn why initial public offerings (IPOs) aren't the best option for every company. Find out factors to consider before going public.
Trading Center