Is it just me, or is a a Market Makers' role in Order/Execution/Settlement confusing? Question: The CEO of Webull talked about their Market Maker, saying: "We're able to buy a share without driving up the stock 10% every time?" What does this work with Price Discovery & Supply & Demand?

Submitted by ringingbells t3_ygozrh in wallstreetbets

Quote: "We're able to buy a share without driving up the stock 10% every time?"

::Video of Quote::

::Context of Quote

Can someone explain what he is talking about to me at a 3rd grader's comprehension level?

https://preview.redd.it/1t1io2h81sw91.jpg?width=880&format=pjpg&auto=webp&s=d612034056d239d6d020ed33e19eaff5bcfdaf91

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doublejay1999 t1_iu9p164 wrote

You’re not supposed to look behind the curtain.

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Extremely-Bad-Idea t1_iu9nflu wrote

Market makers are brokerages so big that they can internally match buy and sell orders from their own client traffic. Market makers do not need to go outside to an exchange (like NASDAQ) to find a buyer for their seller, or seller for their buyer. The system is kept honest by using the last quoted price from a major exchange (again like NASDAQ).

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ringingbells OP t1_iu9oa9o wrote

Thank you. So, let me get this straight: you are saying it doesn't affect supply & demand because it never actually gets purchased, the market maker just switches ownership within the company's sellers, keeping all that info internal to the Market Maker?

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notausername86 t1_iu9z2fx wrote

Yea, well kinda. Atleast from what I understand from the research I've done and how it works is like this. I could be totally off base but I've been told that this is exactly the reason why you don't Wana use brokerages such as webull and rh

So what happens in actual real life is that these brokages own a pool of shares of some of the biggest/largest/popular/in demand stocks. So for example let's just use apple. So a brokerage like webull "owns", just for sake of ease and understanding, 500, 000 shares of apple. So then you, as a retail investor using that brokerage wants to buy 500 shares of apple. On the other end of that, another one of their customers wants to sell 500 shares of apple (or several others using the brokerage), or they themselves can sell it to you from their pool, so instead of pulling the shares from an exchange, they pull it from themselves, and thus can set it up so the buying/selling of those shares doesn't cause a jump in the price of shares, because those shares are being done intentally, rather than externally. When you buy these shares from these brokerages you don't actually "own" the shares, you just have the right to buy and sell them (if that makes sense). This is the theory behind why people who were holding gme were direct registration their shares, as when they do that, they by regulation do own the shares (and thus these brokerages can not loan those shares out or manuplate the data)

As I understand it, brokerages where you pay a fee (like fidelity or tdameratrade) doesnt work like this, and when you purchase shares on those brokerages you do own the shares, and this is why you pay a fee (or atleast again, thats what ive been told) and they do get them directly from the exchanges (thus effecting the price of the stock). It's a bit more complex than that, I think the data of the sell still gets recorded in the level 2+ data and if the demand surpasses their supply they que up the order to add to their exsisting pool of shares, and I think that depending on the ticker that the order does get routed to an exchange. It's all very complex, and I don't know if I fully understand how it works. Maybe someone else can chime in and give more details or tell me where I'm wrong.

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ApeHolder42069 t1_iucgwtx wrote

There's just one catch as far as I understand when talking about buying through Fidelity f.ex. if you are buying less than 100 shares (this amount varies according to the price of the stock, IIRC it's like brackets of 10, 100 and 1000 something like that) then it's an "odd lot" and it won't affect the NBBO.

So most smaller trades by retail have absolutely no affect on the price.

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Extremely-Bad-Idea t1_iu9q5wj wrote

Marker makers are doing the exact same thing that exchanges do. They match buyers and sellers.

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stockpyler t1_iubiacb wrote

But they do it internally so as not to affect the stock price on the exchange, where the actual price is quoted from right? The exchange that never sees those buy/sell orders?

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[deleted] t1_iu9rdmr wrote

[deleted]

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Extremely-Bad-Idea t1_iu9t5z9 wrote

I am unaware of any volume requirements that the NYSE or NASDAQ are required to maintain as part of their SEC licensing. Obviously they are huge and process billions of shares in trade every business day.

Regarding individual market makers, I believe that any SEC licensed brokerage can be a market maker for one or more stocks. Big brokerages, such as Fidelity and Schwab, can easily make internal matches between buyers and sellers for heavily traded stocks like Microsoft, Exxon, and Macy's. However, they may need to still need to divert some orders to exchanges when they can't match them immediately.

For thinly traded stocks, such a small caps, the exchanges are very important. Even big brokerages typically cannot be market makers for those.

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ringingbells OP t1_iu9t5oj wrote

>"Marker makers are doing the exact same thing that exchanges do."

  • What trading volume, as a Market Maker or entity, do you need to hit to require induction as a public exchange?

  • For that matter, as a side note, what is the trading volume of the current market maker deck compared to public exchanges like Nasdaq, Cboe, NYSE, etc...?

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mollila t1_iub05px wrote

Not only switching ownership, but market makers are allowed to sell stocks without having it, in order to 'provide liquidity'. They can add stocks into the system, and cover it later. Not actual registered shares of a company of course, but the so called beneficiary owner shares traded under the DTCC system encompassing all the brokers etc.

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Effective_Health2358 t1_iubzrbu wrote

Exactly, but sometimes they don’t have organic traffic to cover the buy/sell orders.

In these cases, they just go short the shares ppl buy and later cover from the market or internal traffic.

By law, they must deliver shares within the bid/ask of the market, which protects retail.

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imhere4thestonks t1_iu9tsom wrote

Market makers can and do internalize but they also operate on exchange and where they really get the name market maker, when they are a designated market maker, they are responsible to fill buy and sell sides to complete trades that would otherwise not be filled.

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devowed t1_iu9ni69 wrote

The explanation is already there you just have to understand it.

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emielbo2 t1_iua1276 wrote

Exactly, the explanation in the image is as clear as it gets...

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ringingbells OP t1_iua59eh wrote

No. Not exactly, it doesn't answer the question. The question was about Price Discovery/supply/demand as to why Webull can buy a stock without affecting the stock's price. I needed /u/Extremely-Bad-Idea's and /u/notausername86 comment for that.

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emielbo2 t1_iua5mbq wrote

He is describing a darkpool, not a market maker. Specifically a broker-dealer dark pool. A market maker is simply a company registered at an exchange (usually investment banks, but not always) that acts as a middleman, both buying and selling shares on the exchange so that there is enough liquidity to complete transactions. They make money by buying shares for P-1 and selling for P+1, so to say. When you place a buy order you pay slightly more than you would get if you sold that same share. Market makers earn their living on the difference between those two.

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Swiftnice t1_iu9mqc4 wrote

You don't need to know how it works just buy and sell your options and shut up.

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ringingbells OP t1_iu9mu22 wrote

Woah, guy... pull the E-Brake. Fuck my wife a little, and get some PNC.

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syxxnein t1_iu9ol1w wrote

Fuck middlemen

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UGLVARPG t1_iua2xmk wrote

They decide where they quote

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NOSCommodities t1_iuefkyk wrote

It’s illegal for a market maker to fill an order internally without first attempting to fill in the open market. There are lots of rules and regulations for ensuring a customer’s order follows ‘best execution’ rules. Market makers are also institutions that are allowed to trade in the Dark Pools, which explains not affecting price. So while acting as a market maker, they are not only trading stock for and out of their own inventory but executing transactions for others as well.

Even though WeBull is your broker, they still must route your order to the open market. If they are offering the security at a better price, they are allowed to fill your order however.

Market Makers are important for providing liquidity to the overall market, as without the DMMs and other MMs it would be a lot harder to get your order filled. Market Makers also makes the ‘spread’ of the security (keep in mind we BUY at the ask, and SELL at the Bid while the Market Maker BUYS at the Bid and SELLS at the ask so they also receive an immediate gain in that sense).

As a client with any brokerage, you have the right to ask your brokerage what exchange your order executed on and even who you traded with. They must maintain these records for at least 1 year (the rule I believe is three years do not quote me on this part though)

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ringingbells OP t1_iueg2v3 wrote

Thank you for writing this. I read it all the way through.

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VisualMod t1_iu9mikz wrote

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1

VisualMod t1_iu9mj69 wrote

>He is talking about how they are able to buy a share without driving up the stock 10% every time.

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Effective_Health2358 t1_iubzhu6 wrote

Basically, your broker puts in your order for 100 shares of Gme.

Then, instead of going into an illiquid market, the MM just shorts 100 shares and delivers them to the broker so they are now in your account.

Since the MM doesn’t actually go to the market, large orders won’t move the price.

In theory, this is very good for retail.

MMs make a profit bc they quickly look for shares and cover the 100 shares short for Gme. They take the spread between what you buy the shares at and what they can eventually find them on the market for.

Bc this process is very good for end users, the SEC has given all kinds of special exceptions to MMs who help the system function.

The problem comes in when the MMs cannot actually find real shares in the market….and they are already short in order to deliver shares to the broker.

This has lead to a crazy tap dance where various institutions try to get out of their Gme holdings but cannot.

A lot of the burden is in MMs since they do not have to cover the way that other players do…however, it is a heavy bag that they are holding that eats into their profits.

Eventually, MMs will close and Gme will moon so hard.

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