The specialists are essentially lone and designated market makers with a monopoly over the order flow in a particular security or securities. Because the NYSE is an auction market , bids and asks are competitively forwarded by investors.
The specialist posts these bids and asks for the entire market to see and ensure that they are reported in an accurate and timely manner.
They also make sure that the best price is always maintained, that all marketable trades are executed, and that order is maintained on the floor. The specialist must also set the opening price for the stock each morning, which can differ from the previous day's closing price based on after-hours news and events. The specialist determines the correct market price based on supply and demand.
Here's a hypothetical example to show how a market maker trades. Let's say there's a market maker in XYZ stock. A market maker participates in the securities market by providing trading services for investors and boosting liquidity in the market. They specifically provide bids and offers for a particular security in addition to its market size. Market makers typically work for large brokerage houses that profit off of the difference between the bid and ask spread.
A number of market makers operate and compete with each other within securities exchanges to attract the business of investors through setting the most competitive bid and ask offers. In some cases, exchanges like the NYSE use a specialist system where a specialist is the sole market maker who makes all the bids and asks that are visible to the market.
A specialist process is conducted to ensure that all marketable trades are executed at a fair price in a timely manner. Market makers earn a profit through the spread between the securities bid and offer price.
Because market makers bear the risk of covering a given security, which may drop in price, they are compensated for this risk of holding the assets. Securities and Exchange Commission. Career Advice. Stock Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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