Exchanges

Market Makers and Specialists

Both Market Makers (MMs) and Specialists (specs) make market in stocks. MMs are part of the National Association of Securities Dealers market (NASD), sometimes called Over The Counter  (OTC), and specs work on the New York Stock Exchange (NYSE). These people serve almost similar function. (The roles of specialists have been explained in detail in the later sections)

The NASDAQ

NASDAQ is an abbreviation for the National Association of Securities Dealers Automated Quotation system. It is also commonly, and confusingly, called the OTC market. The NASDAQ market is an interdealer market represented by over 600 securities dealers trading more than 15,000 different issues. These dealers are called market makers (MMs). Unlike the New York Stock Exchange (NYSE), the NASDAQ market does not operate as an auction market (see the article on the NYSE). Instead, market makers are expected to compete against each other to post the best quotes (best bid/ask prices).

The New York Stock Exchange

The NYSE uses an agency auction market system, which is designed to allow the public to meet the public as much as possible. The majority of volume (approx 88%) occurs with no intervention from the dealer. Specialists (specs) make markets in stocks and work on the NYSE. The responsibility of a spec is to make a fair and orderly market in the issues assigned to them. They must yield to public orders which means they may not trade for their own account when there are public bids and offers. The spec has an affirmative obligation to eliminate imbalances of supply and demand when they occur. The exchange has strict guidelines for trading depth and continuity that must be observed. Specs are subject to fines and censures if they fail to perform this function. NYSE specs have large capital requirements and are overseen by Market Surveillance at the NYSE. Specs are required to make a continuous   market. Another auction-based exchange is AMEX (American Stock Exchange), which accounts for 3% of all exchange volume. NYSE accounts for 85%.

Over The Counter (OTC)

The over the counter market (OTC) is not a central physical marketplace but a collection of broker-dealers scattered across the country. This market is more a way of doing business than a place. Buying and selling in unlisted stocks are matched not through the auction process on the floor of an exchange but through negotiated bidding, over a massive network of telephone and teletype wires that link thousands of securities firms in the U.S and abroad. Example: NASDAQ