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What is a market maker - market makers make money off each stock trade in the market

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  • What is a market maker - market makers make money off each stock trade in the market

    Market makers in the stock exchange are the ones who handle the trades of stocks. A market maker basically BUYS stock from a seller and then SELLS it to a buyer. At all times a market maker (mm) separates the bid and the ask prices, so that he is offering to pay less to BUY your stock than he is willing to accept to SELL it to you.

    For example at a given moment a stock such as say NFLX might trade at a BID price of 648.5 with an ASK of 649. That's an average spread, at least for a stock like NFLX, of fifty cents between the bid and the ask. (On some stocks, such as AAPL, MSFT or QQQ, the bid/ask spread may be as low as a single penny.) By separating the bid and the ask, the mm ensures that no matter what he pays for a stock he will always pay less than he will be willing to sell it for at least at that same moment. Whenever a mm buys a stock and then sells it, or sells it and then buys it back, he POCKETS at a minimum the difference between the bid and the ask. This is the primary way mms make money. Win, lose or draw - they collect the bid/ask spread. (And besides that guaranteed action, they also trade in the stock themselves including even shorting it
    What is shorting a stock? What is going long? - Free EBAY, PayPal, Business and Law Forums - Ebay Suspension, PayPal Limited
    just like any other trader.)

    Besides the legitimate (but oftentimes unfair) pocketing of the bid/ask spread (which on some stocks the mms may arbitrarily decide to separate by as much as a dollar or even two, just to see how far apart traders are willing to pay to get the stock), mms also employ less than ethical borderline illegal tactics to trick people into giving them their shares cheap so that they may turn around and sell the same shares to others for more. One tactic is to raise artificially the bid to match with some large buy order, to make the buyer think he got the best price, and then drop it back down suddenly. Or to lower the bid on the stock just after a large fill to trick the guy holding the stock into dumping at a lower price. (That sort of trickery seems to come at me all the time after I've just been filled on a large stock order.) There are all sorts of tactics mms use to trick stock traders into giving up their shares at a low price, and buying the same shares back higher.

    One of the biggest misperceptions is that a stock rises in price because there are more buyers than sellers. Actually, in order for a stock to trade, there has to be an equal number of buyers of shares and sellers of shares or else there may be no movement (if all we have are buyers, and no sellers, a stock may not trade at all). So when a stock goes up, it is not so much because there are more buyers than sellers, but because buyers are willing to pay more for the stock, and sellers are UNwilling to let their shares go cheap. As the mms notice higher offers, they raise up the stock price to match up the bids with the asks, to keep the stock trades flowing. Multiply these thousands of bids and asks for shares over the course of a day, and you have the natural (or in some cases, manipulatively UNnatural) flow of the stock market.
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