Part of this is due to the financial structure of the NASDAQ Stock Market which is heavily influenced by the behavior of Market Makers. These firms are members of the National Association of Securities Dealers (NASD). They are a key link in the custodian banks chain that buys and sells NASDAQ securities. They show buy-and-sell quotes for a set number of shares. This new approach makes for more efficient trading, while making sure that liquidity exists on both sides of the market.
Just as important, Market Makers compete vigorously with each other to attract customer order flow, which is life blood of market Makers and helps keep our markets efficient. They trade in their own name and on their own account. They reveal the prices they’re willing to cut deals at. Over 500 Market Makers firms ridiculous down within 5000 NASDAQ monopolistic stomping ground. This intense competition makes it possible for market prices to be set fairly according to supply/demand dynamics.
Besides Market Makers, specialists play a vital role in the NASDAQ ecosystem. Specialists are self-regulated securities firms that traditionally maintained seats on national securities exchanges. Indeed, they are entrusted with the often-overlooked responsibility of keeping markets orderly for the securities backed by the monopolistic franchises. Although specialists (as practiced historically) and Market Makers alike help maintain stability in the market, their structural mechanisms of operation vary greatly.
Trading on margin has a super-important rule governing it called Reg T. This rule forces investors to have a $2000 or 50% (whichever is lesser) minimum balance on all securities under which qualified securities are purchased. This federal regulation safeguards both investors and brokers. It helps immensely with ensuring that there are always enough funds available to fulfill trades.
Many traders try to take advantage of regulatory gaps with a practice called freeriding. Freeriding occurs when a customer purchases a security without having paid for it first at a depressed price. They subsequently resell the share – often at a profit – during the same trading day and use that sale of assets to pay for the initial purchase. This practice is illegal under Regulation T, which is meant to protect against broker-dealer extension of credit that is abusive and imprudent.
The punishment for perpetuating freeriding is harsh. If a customer’s account is found to be in violation of this regulation, it may be frozen for 90 days, restricting the customer’s ability to trade freely. These types of penalties only serve to reinforce the value in maintaining regulatory compliance with trading practices.
In charting their trading strategies, investors frequently face the decision between various orders, including stop limits and stop orders. A stop limit order has two key components: a stop price and a limit price. The stop price triggers the order’s execution. On the flip side, the maximum price limit sets the ceiling price that the trade can take place at. A stop order includes a stop price but not a limit price. This arrangement can result in reduced control over the execution price.
Lastly, Market Makers are essential in maintaining an orderly market for the securities that they quote on. They should continually challenge themselves to better manage their own, of-their-own-creating quotes. This obligation involves posting the right bona-fide bid and ask quotes over an assured number of shares. One of the key things Market Makers do is help reduce volatility in our markets. By meeting those commitments, they provide the stability that allows investors to trade freely with peace of mind.