While the capital requirements and market making changes are significant, NASDAQ is most dramatically different from other exchanges by its extreme – but functional – structure of competing Market Makers. More than 500 companies today serve as Market Makers on the NASDAQ Stock Market. Each one competes to give investors the best liquidity and worst trading execution. This competitive environment is one of the most important factors that sets NASDAQ apart from other large U.S. markets.
Market Makers support the market by being constant buyers and sellers, allowing for smooth trading. They hold much power since they are tasked with executing both buy and sell orders. Their actions have the capacity to sway market equilibrium. In particular, in turbulent market environments, execution of orders can get complicated and hit or miss. If an order for 10,000 shares goes in, the market’s hope is to execute all 10,000 at the quoted offer. The price shown in the real-time market quote reflects that there are indeed 15,000 shares available at $5. Hence, as a customer, you would assume the order would be executed at that price.
The reality can differ. In an electronic market where prices are moving rapidly, a single order for 10,000 shares may fill in two chunks of 5,000 shares with each price. That’s because the order may get partially filled at multiple price levels. For instance, you might load it up with 2,500 shares at $5 and 7,500 shares at $10. This occurs despite prior and fairly clear signal that there is lots of demand at $5.
Such discrepancies may occur in an instant. This happens due to the fact that prices can fluctuate dramatically from the time you get a quote to when you place your order. Market Makers need to be aware of these rapid shifts in the market because it can create enormous price disparities in a matter of seconds.
Market volatility is a second key factor in NASDAQ trading. Stocks often have large movements in intra-day trading, leading to increased margin maintenance demands. For highly volatile issues, set-aside and continuing obligations can go as high as 70%. The increasing use of margin illustrates how dangerous volatile growth stocks can be. This is particularly true in key sectors such as broadband internet, e-commerce or other advanced industries.
When routing market orders to NASDAQ exchanges, traders should be conscious that executions are first-come, first-served. If there are pending orders in front of your specific trade request, those will be filled before yours. This order execution protocol built up a huge focus on execution timing, chiefly in an ultrafast and volatile market.
One of the primary risks in this environment is that “real-time” price quotes may not accurately reflect current market conditions. The markets in which we operate are volatile and prices and trades fluctuate quickly. If traders are still depending on stale information, they are vulnerable to profound financial penalties stemming from differences between quotes received only seconds apart.
The razor’s edge of NASDAQ trading creates an extremely difficult situation for both traders and Market Makers. In navigating this complex landscape, participants must remain vigilant and informed about the intricacies of order execution and market behavior.