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The independent brokers execute orders for firms that do not have their own

full-time commission brokers or when the commission brokers are too busy to handle all their orders


Specialists are responsible for maintaining a

fair and orderly market in the stocks assigned to them. Every stock that trades on the NYSE is assigned to a specialist who resides at a station near the stock's trading post. The specialist is also referred to as a Designaled Market Maker (DMM).


The specialist performs a number of functions. First, the specialist acts as

auctioneer. Specialists are responsible for making sure that the continuous auction for each of their stocks is orderly and fair. They continually display the best bids and offers on securities throughout the day. This information is transmitted electronically all over the world. The specialist is also responsible for setting the opening price of the stock at the beginning of each trading day


Most retail orders are routed electronically to a specialist using the

NYSE's SuperDOT system. The SuperDOT system allows orders to be entered on the branch level, directly into the computer system. The order bypasses the floor broker and goes directly to the specialist for execution. The order can be executed quickly and efficiently, and reported directly back to the branch


The specialist also takes on the role of agent when

executing customer orders. Besides the orders that are transmitted electronically to the specialist's book, floor brokers will send orders that cannot be immediately filled to a specialist. The specialist holds tl1e orders that were entered away from the market, until they are filled or canceled. If tl1e order is filled, the specialist receives a commission


The specialist may be required to act as a

catalyst or matchmaker. The specialist often knows who is interested in buying or selling a particular stock and keeps track of these interests. All the potential buyers and sellers may not be in the trading crowd at any given time. By telling buyers of potential sellers and vice versa, the specialist helps trades to occur that might otherwise not happen


It is sometimes necessaiy for the specialist to act as principal when buying and selling for his own account. According to NYSE rules, specialists must

never compete with public orders--all customer orders at a paiticular price level must be executed before the specialist's own order. However, when a disparity in the forces of supply and demand causes the difference between the lowest offer and the highest bid to become too large, the specialist will step in to narrow the gap. This is an important part of fulfilling the specialist's obligation to maintain a fair and orderly market


By definition, any securities transaction that does not occur on one of the exchanges takes place in

the over-the-counter (OTC) market. The over-the-counter market represents a negotiated marketplace where one buyer negotiates with one seller. There is no centralized meeting place such as the floor of an exchange. Transactions are conducted through a telephone and computer network that connects the participants, rather than face-to-face


Numerous types of securities trade in the over-the-counter market, including

corporate stocks and bonds, municipal bonds, and United States government and agency securities. In contrast to the exchanges, particularly the NYSE, companies whose stocks trade in one of the OTC markets are much more diverse. They include both well-known, large-cap companies such as Microsoft, as well as a large number of small- and micro-cap companies. FINHA regulates broker-dealers operating in the over-the-counter market


Trading on an exchange is centered around the specialist and the trading post. In the more decentralized over-the-counter market for equities, the focus is on

market makers


A market maker is the equivalent of a

"specialist in the over-the-counter market. Market makers arc OTC dealers who stand ready to buy or sell a minimum number of shares of a specific security, at a quoted price. The number of shares they are required to buy or sell depends on the security and the OTC system in which the market maker participates. For example, if the security is traded on the Nasdaq system, the market maker must honor its quote for a minimum of 100 shares. While a regular dealer (principal) may, at times, buy or sell one or more securities for its proprietary account, a
market maker is always prepared to do so. A market maker must always be able to take the other side in a transaction with an investor or dealer who wants to trade the security"


Unlike an exchange where there is only one specialist for each security, an OTC security may have

any number of market makers. Market makers play a central role in the OTC markets. They act as a reservoir of interest for securities, absorbing stock when there is an excess supply and providing stock when demand is high. Market makers buy and sell for their own profit, at their own risk. The risk can be considerable for smaller, more illiquid stocks


Quotations in the OTC market are similar to those that are made on an exchange. All market-maker quotes include the bid price at which the market maker is willing to

buy the security and the offer price at which it will sell the security. The difference between the prices at which the market maker buys and sells is the spread, which is also one source of the market maker's profits


Unless otherwise stated, all quotes arc considered

firm, meaning that the market maker is ready to sell to or buy from other dealers at that price and size (the number of shares quoted) without further negotiation or review. Quotes that are not firm are called subject (nominal) quotes


Retail customers, however, pay a price

greater than the offer when buying securities or receive a price less than the bid when selling. This price differential is based on a markup or markdmm-essentially adjustments from the dealer-to-dealer quoted prices


A markdown or markup is what a firm receives when it acts as a

principal and buys or sells a security from its own account. When a customer sells to a broker-dealer acting as principal, the markdown is a charge subtracted from the prevailing market price at the time of the transaction, with the customer receiving the resttlting net price. If a customer buys a secmity from a broker-dealer acting as principal, the firm adds a markup to the prevailing market price and charges the customer the net amount


Nasdaq is by far the most important of the networks that

connect participants in the over-the counter market. Nasdaq is an advanced computer and telecommunications system that provides member firms with quotations on certain over-the-counter securities. It represents the largest securities market in the country, listing over 3,000 different companies and trading more shares daily than any other U.S. market


There are three levels of service provided by the Nasdaq system

Level I provides the highest bid and the lowest offer (the inside market) for any given security without identifying the market maker. Level II provides the best bids and offers for all market makers that deal in the security. Level Ill allows the market makers themselves to enter bids and offers


Nasdaq is an electronic exchange, and securities that trade on it must meet certain

listing requirements. The exact standards that must be met depend on whether the security is classified as a Nasdaq Global Market (NGM) security or a Nasdaq Capital Market security. The standards are more stringent for NGM securities, which tend to be more well-known and more widely traded than Capital Market securities


There are many stocks issued by small companies that are not listed on either Nasdaq or one of the other traditional exchanges. There are two sources for quotations for these securities, which are usually thinly traded. These are the

Pink Market and the OTC Bulletin Board (OTCBB)

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