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at the published financial statements of many of these market maker firms; they are paid quite handsomely for "being there." If you trade Nasdaq stocks, you will do business quite often with market makers, and you will pay them the spread for the privilege. |
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Much has been written about the "tricks" market makers use to affect prices in the short term. Knowledge of these tricks can be quite important if you are an active day trader because you make your living off of minute-to-minute price movements. However, because this book is aimed at traders with a longer time horizon these market maker tricks will have virtually no effect on your profitability. |
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The problems most of you will have in dealing with market makers will be related to "size" and "liquidity." As of August 2000, a market maker is not required to post the real size of its interest. For example, it may post a bid on MSFT at 68 1/2 and it may show "size'' of 100 shares. You have no way of knowing if it is only interested in 100 shares or if it wants many more shares at that price. How does this affect you? Profoundly. |
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This "blind spot" means you cannot discern the strength or depth of the market. Let's say you want to sell 1,000 shares at 68 1/2. You want to know: What is the real liquidity at 68 1/2? How deep is the market at that price? |
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You may get an execution of all 1,000 shares at 68 1/2, or you may just get 100 shares at 68 1/2, and the rest at 68 1/4. You cannot get the information you really need! That can cost you moneysometimes a lot of money. |
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It was precisely this problem with market maker size and liquidity that fueled the growth of the ECNs. As we discussed in Chapter 1, the Electronic Communication Networks are the Fifth Market. They are viable alternatives to the Nasdaq. Many times they are preferable alternatives to the Nasdaq. |
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If you trade through an ECN, you are not actually trading "on" the Nasdaq, and you are not trading with a market maker. Instead you are posting your bid or offer directly to the computers of the ECN for electronic matching against someone else who has posted a bid or offer. |
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The advantage of the electronic matching of orders on an ECN is that many times you can get improved pricing between the spread. How does that work, and what does that mean for you? |
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