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. Insights

    Designated Market Maker

    A designated market maker maintains fair and orderly markets for an assigned set of listed firms and improves market liquidity.
  2. 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 ...
  3. 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.
  4. Trading

    The Basics of the Bid-Ask Spread

    Successful traders must be aware of the difference between the bid price and the asking price of a security.
  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 ...
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
Trading Center