Market Makers and Secondary Market Operations

Vocabulary flashcards generated from lecture notes covering secondary market trading, market makers, NYSE operations, and bid-ask mechanics.

Market Maker

A firm that makes a business out of trading securities with the public by buying securities from investors and selling them to other investors.

Primary Market

The market where securities are originally sold to investors by issuers.

Secondary Market

The market where securities are traded among investors after being originally issued.

Bid Price

The price a market maker is willing to pay to buy a security, stated alongside the number of shares they are willing to buy at that price.

Ask Price (Offer)

The price a market maker is willing to accept to sell a security, stated alongside the number of shares they are willing to sell at that price.

Spread

The difference between the bid price and the ask price, which serves as a primary source of profit for a market maker.

Round Lot

A standard trading unit of $100$ shares of stock.

Quote Size

The number of round lots a market maker is willing to buy at the bid price and sell at the ask price, often formatted as bid size x ask size (e.g., $4 \times 7$).

Efficient Market

A market characterized by active trading and small spreads, allowing market makers to accumulate substantial profits through high volume.

New York Stock Exchange (NYSE)

The world's largest stock exchange, operating in some form since 1792 as an auction market.

Designated Market Maker (DMM)

A specialist assigned to a specific NYSE-listed stock to facilitate trading by matching buyers with sellers or trading from their own inventory.

Agency Transaction

A trade capacity where a market participant or DMM matches buyers and sellers without taking a position from their own inventory.

Principal Transaction

A trade capacity where a professional or DMM trades directly with clients using their own inventory.

Super Display Book

The traditional NYSE order-routing system that routes customer orders to the DMM for execution (updated in 2012 to the Universal Trading Platform).

DMM's Book

The NYSE's order book where limit orders currently away from the market are placed and tracked.

Limit Order

An order that sets a maximum price limit for buying or a minimum price limit for selling a security.

Away from the Market

The status of a limit order whose specified price cannot currently be executed because it is outside the current market trading price.

Inside Market

The highest available bid price and the lowest available ask price currently resting on the DMM's book.

Market Order

An order requesting immediate execution at the next available market price.

Stopping Stock

A temporary price guarantee provided by a DMM to a floor broker for a public order while the broker attempts to find a better price.

Floor Broker

A firm representative who physically works on the NYSE floor to execute large customer trades that are not handled electronically.

Market Capitalization

The total market value of outstanding shares, calculated as $\text{Outstanding shares} \times \text{market price}$.

Dual-Listed Stock

A stock that is listed and traded on the NYSE as well as another exchange, such as a regional exchange.