The NASDAQ Stock Market has a highly decentralized market structure that sharply separates it from the other large U.S. The heart of this structure is an ever-growing list of competing Market Makers, which include more than 500 firms at last count. These Market Makers are in an essential and unique role, helping to make sure that trades are routed fairly and efficiently executed. In comparison, specialists on national securities exchanges balance supply and demand for the securities they have exclusive franchises to trade. While the NASDAQ’s fast markets are vibrant, they create snares such as real-time quoting errors and a build-up of pending orders. The Market Makers’ system is brilliantly equipped to cut through these intricacies.
The Role of NASDAQ Market Makers
The NASDAQ Stock Market is essentially different due to its very structure of competing Market Makers. That singular reality truly sets it apart from any other marquee U.S. market. Market Makers are entities that continuously buy and sell a specific security at a publicly quoted price. They supply liquidity, they keep the markets functioning, and they make markets tradeable. Over 500 businesses are registered as Market Makers on NASDAQ. This ferocious competition ensures the rapid and unbiased implementation of trades.
In the frenetic marketplace of securities trading, the importance of Market Maker’s role is amplified. They directly route trades by buying or selling assets out of their own order book. Second, they actively find the other side of a trade in order to fill that transaction. This is usually accomplished in often under one minute, due in large part to their high-frequency trading models and algorithms.
Market Makers have always been essential to keeping markets orderly during volatile times. Markets are fast, prices and trades jump the gun quickly. This creates the potential for large variances in price across quotes you may get just moments apart. Yet despite all of these challenges, NASDAQ’s system provides a level of confidence that trades are executed efficiently and most importantly fairly.
Specialists on National Securities Exchanges
While NASDAQ relies on its network of competing Market Makers, other major U.S. markets utilize specialists to maintain orderly markets. Market makers Specialists are securities firms or individuals holding seats on national securities exchanges. Their core mission is to operate the securities over which they maintain monopolistic franchises.
Specialists help make sure that trades are carried out fairly and efficiently by keeping order within the markets they control, or “specialize” in. They act as auctioneers, matching buy and sell orders at the best possible prices while stepping in to stabilize prices during periods of market imbalance. This system is in stark opposition to NASDAQ’s system of multiple competing Market Makers fighting to provide the best liquidity and get the trades done first.
During rapid markets, specialists provide an essential role. When order flow spikes, they save traders from costly price slippage by ensuring trades execute. Best of all, specialists are fighting these flames every day. They maintain healthy order books and a steady completion time with trades.
Challenges in Fast Markets
Fast markets pose severe challenges to NASDAQ Market Makers and specialists of national securities exchanges alike. In these environments, live quotes more accurately reflect what is sometimes called a “phantom market.” This misalignment happens at the time an order is received. Since prices and trades are constantly changing at a rapid pace, there could be a significant discrepancy between quotes obtained just seconds apart.
This fast pace can lead to a queue of buyers’ orders, leaving time for much longer delays in filling trades. In certain cases, we may need to fill a client’s order using several different legs. As an example, we could submit two different orders for 5,000 shares. But even with these hurdles, NASDAQ’s model of thrifty, competing Market Makers is built to manage the rigors of blistering markets effectively.
The capacity to swiftly and equitably transact trades is fundamental to upholding investor trust and guaranteeing market calmness. Both NASDAQ Market Makers and specialists on other exchanges work tirelessly to navigate the complexities of fast markets while upholding their responsibilities to investors.