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Finance allah shmoop What is a market maker What is

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a market maker Hint He comes right after the butcher

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and the baker Okay so you have lots of buyers

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and lots of sellers and they come together a g

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rated lee in a market which is so big it

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has to be divided into segments or sections or sub

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groupings of aa few stocks or bonds in which the

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specialist trades and that specialist volunteers there time because they

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loved it well actually know that not all true they

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get paid a lot Ah lot When things go well

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how are they paid Well through spread and not the

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warm butter kind Instead spread refers to the money value

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between a bid and an ask price under a market

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maker structure of trading securities No more wire hangers a

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plastic hanger company is publicly traded on an exchange like

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nasdaq where buyers bid for a price to purchase and

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sellers asked for a price to trade no more Wire

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hangers is bid this moment at thirty seven twenty three

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a share by buyers willing to pay by right now

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at that price and is being asked at this moment

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at a price of thirty seven thirty one Note the

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eight cents a share difference in the share prices that

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def is the spread between the two prices and it's

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worth noting that in extremely volatile stocks the spread widens

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and in boring highly liquid stocks which don't move much

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the spread titans or is narrower that is on a

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volatile equivalent of no more wire hangers The spread might

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grow to twenty or thirty cents a share whereas a

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boring name that pays a big dividend and the stock

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never moves much We're thinking t here well that spread

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might be just three or four cents So why grow

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Well Because a market maker in a volatile stock doesn't

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want to be caught losing money on her inventory The

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market maker never once to be punished for providing liquidity

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and market makers provide liquidity for stocks bonds and well

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basically anything else they think they can generate revenue from

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spreads in If no more wire hangers suddenly gap down

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to thirty seven Ten a share Well it would be

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likely less than the average of what the market maker

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pa paid for her quote inventory unquote in that stock

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from which he was making a market in it Each

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time the shares trade the market makers dip into that

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spread to pay their bills and allow them to keep

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doing business So that spread and it's not the type

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that prince used teo sing about Okay so then specifically

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what's a specialist i wouldn't have a movie Stallone wait

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different kind of specialist in finance land a specialist is

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the gala guy trading in a given stock that is

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there a member of a stock exchange and they might

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carry inventory of satan Ten million shares of microsoft trading

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currently at around forty bucks a share Their offering msft

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for sale it forty point oh five and they're our

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buyer of msft this moment at thirty nine ninety one

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and see there's a fourteen cents a share spread their

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meaning that they make fourteen cents every time they transact

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So let's say that specialist sells a million shares of

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microsoft today earning a fourteen cents spread per share while

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fourteen cents times a million one hundred forty grand and

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clown Nice a day for one day's work so that's

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a pretty widespread in the scheme of things because often

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brokers have to tack on their own commission of a

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few cents on either side and the specialist might in

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fact be dealing from their inventory to brokers on both

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sides of a transaction in which case they're spread I

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even spread to the actual specialist might be just a

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few cents times those million shares like four cents times

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a million gets forty grand something like that It's still

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a really good living But if it's so good then

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why don't millions of people fight for that job Like

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how hard it is Is it tio Just nod your

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head and right down buy or sell and then a

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number You think everyone who flips burgers at mcdonald's and

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is afraid of robots taking their jobs would be killing

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for this gig Well in order to be a specialist

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Not only do you need you know special education and

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a few siri's license exams but you also need capital

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with which to buy inventory risky inventory which you'll hold

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as if they are casino chips and you are more

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or less the house So when the microsoft shares example

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just to be a specialist in that one stock well

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you have to raise something like one hundred million dollars

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because you'll have to go into the market to start

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and simply by you two or three and call two

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and a half million shares at around forty bucks each

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for a total cost of ahhh ondo or a silicon

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valley unit That's What units called out here And yes

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that's an investment in the stock could go up but

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it could go down as well leaving you holding a

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big fat smoldering bag of dog crap dot on and

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also going whoever your investors or creditors workout one hundred

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million dollars Like if microsoft has kind of evaporated you

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know what could happen More risks will haunt your sleep

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in that the stock and suddenly gap down three dollars

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on a bad quarter at which point Your spreads must

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widen to accommodate expected further volatility in the stock And

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you then compete with other specialists who also make a

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market in microsoft Well at any given time they may

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want to go get out of trading in it and

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undercut you Buy any or to a share leaving you

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as the sole big owner of what will feel like

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a stock version of the titanic Well the math gets

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complex is the market gets volatile specialists use hedges and

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human beings end up competing against a i'd driven black

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box computers But the reason you exist as a specialist

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or rather the key job or responsibility of the specialist

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is to provide liquidity That is you have to buy

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and sell shares too Accommodate hey the market that's your

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job and in volatile markets it means that they might

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run out of inventory or be squeezed and have to

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buy shares at much higher or sell shares at much

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lower prices than their costs But that's the risk you

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take when you become a specialist they must execute on

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these trades and if they don't they lose Their seat

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Is a specialist on the exchange altogether and are more

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or less fully out of work And you know i

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don't know Working for uber lift or something Next Yeah

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And at that point well they might be willing to 00:06:31.755 --> [endTime] take just about anything for a ride

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