Market Makers

Book: Market Makers EdgeVirtually every book on electronic day trading takes the perspective of the individual trader. The Market Maker's Edge turns the tables. Author Josh Lukeman-a market maker who trades millions of dollars every day-discusses how market makers manage to consistently protect their positions and stay one step ahead of traders, including entry and exit strategies, techniques to minimize risk and maximize profit, and other little-known practices of the trade.

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These are the companies who buy and sell stocks from and to you. They guarantee liquidity to the market and make a profit by buying stock from you at one price and selling the shares at a higher price.  If you are trading New York Stock Exchange (NYSE) stocks, aka Listed, they will be called specialists.  A market maker will buy and sell the same stock. For instance if Goldman Sachs is a market maker for Microsoft, if you buy Microsoft's stock you will buy it from them.  If someone else is selling Microsoft, Goldman will buy the stock from that person. They make money because they buy it from you at one price (say $60.50) and the sell it to someone else at a higher price ($60.75). In this example, they will make $0.25 a share. This $0.25 is called the "spread", the price you buy at is the "ask" and the price you sell at is called the "bid". One strategy you can use if you have Level II access is to watch what side of the trade the market maker like Knight is on and take the same side. Level II access will list the order size they are buying and selling. as 10 x 5 for example. This means there is a limit order for 1,000 shares to buy at the bid price and 500 shares they will sell at the ask price.

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