How Stock Quotes Are Made

There are several factors which have influence on stock quotes. The price of a stock is always in fluctuation because it underlies the laws of supply and demand.

Stock quotes have a bid and ask price at all times. The bid price is the price where buyers are willing to buy. The ask price is the price where the sellers are willing to sell their shares. If ask and bid prices are matching then a trade is executed. The praxis is somewhat more complicated as the theory yet.

Usually there is always a spread between the bid and ask price. The spread is always changing together with the stock price, it can widen and narrow depending on the shares volume and market action. You can buy at the ask price but only sell on the lower bid price.

On the stock exchange a market maker or specialist is responsible to provide a current bid and ask at all times. His role is not only to act as an intermediate between buyers and sellers but more importantly to provide a market at all times. That means he must show a bid and ask price at all times where he is willing to buy and sell. If there are no other buyers and you are the only one who wants to sell for instance, then the market maker will buy from you at the price and volume he has shown.

For this work the market maker earns the spread. He has a high risk because he must buy and sell even if he finds nobody to pass the shares onto. That’s why the spread widens when the stock is moving fast or when there is low volume. Under certain circumstances the spread can even be several dollars wide but usually the spread is a few cents only in very liquid stocks.

On the New York Stock Exchange (NYSE) the price is determined be the so called specialist in an “open outcry” system. The specialist handles all orders for a particular stock and he must match the orders at the greatest volume. Many believe there is no spread on the NYSE because they can’t see it but there is one of course. The fee you pay for each transaction goes to the broker and not to the specialist. He earns the spread.

On the NASDAQ for instance these specialists are called market makers. Different markers makers are competing so there are different bids and asks at all times. In addition to that there are many different electronic communication networks (ECN) which posts bids and asks from private and institutional traders at all times. These networks are matching the bids and asks 100{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28} automatically and electronically. These networks making their living from charging an ECN fee per transaction or per share.

Brittney Herbert

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