Day Trading Encyclopedia

Level 2 Market Makers

Market Makers

Market makers are licensed broker-dealers that work for firms to mitigate client orders in the open market. They compete with other market makers by posting the required bid and ask price and size quotes for every stock they make a market in. Market makers get order flow information and will trade in the open market to fill the order for a profit. The profit comes from the spread between what they paid for shares compared to what the client is charged. When market makers complete large order transactions, they will often post the blocks on time and sales. Unusually large blocks are likely market maker transactions that have been completed earlier.

Who are the Market Makers?

Market makers work for broker-dealer firms. As the name states market makers make markets in stocks. They are licensed dealers that are obligated to provide liquidity and assume the risks associated with holding an inventory of shares in stocks they cover in order to maintain an orderly market and facilitate trade transactions. They are obligated to always provide a bid and ask quote during market hours and be ready to buy and sell at least 100 shares of stock they make a market in. They compete with other market makers and electronic communication networks (ECNs) for trades and try to profit from the bid and ask spread of their fills. When an institution decides to buy or sell a large amount of stock, they will spread their block orders through multiple market makers to attain an efficient average price without making too much market impact. As the role and access of ECNs and dark pools has grown through the years, market makers have seen a steady decline in numbers and activity. Market makers are some of the largest users of high frequency trading (HFT) and algorithmic trading programs, which account for up to 70% of all daily trading volumes.

Common Market Makers

The following is a list of market makers as well as ECNs and Exchanges that actively compete for order flow.

VFIN

Vfinance investments is a market maker in over 6,000 stocks across all the exchanges including NYSE, NASDAQ, OTCBB and Pink Sheets. They generate over 15 billion shares of monthly trading volume.

VNDM

Vandham Securities was founded in 1990. This market makers specializes in small cap and illiquid securities as well as makes markets in all major exchanges and U.S. options markets.

PERT

Pershing Securities Ltd. is a market maker based out of London, United Kingdom. Founded in 1990 as a subsidiary of Pershing Ltd and makes markets in all U.S. exchanges as well as London Exchange.

ETRF

G1 Execution Services LLC, was formerly the market making unit of E*Trade Financial Corporation. The firm was sold to Susquehanna International in 2013. The firm specializes in market making on all exchanges and facilitating trades for retail customers.

ADTF

Automated Trading Desk LLC, was a pioneer in automated trading since 1988. This firm utilizes HFT and complex algorithm programs to make markets on all U.S. exchanges. The firm is a subsidiary of Citigroup.

ARCA

Archipelago was an ECN developed by TerraNova Trading LLC, that went live on January 20, 1997. In 2001, the Archipelago Exchange (ArcaEx) was launched on U.S. stock exchanges to quickly and efficiently execute stock trading transactions. ArcaEx purchased the Pacific Exchange in 2005. Archipelago Holdings, parent company of ArcaEx, merged with NYSE in April 2006 changed its name to NYSEArca.

NITE

Knight Capital Group was founded in 1995 and quickly became the largest independent market maker in the U.S. equity markets responsible for up to 17% of all volume on the NYSE and Nasdaq making a market in over 19,000 securities and generating over $21 billion of daily dollar volume and nearing 4 billion shares traded daily in 2012. Knight also developed the DirectEdge ECN. Knight specialized in making markets in all U.S. equities including small-caps and OTCBB stocks servicing retail customers through TD Ameritrade and Etrade. As an early pioneer in high frequency trading, the company suffered a $440 million single day loss due to an algorithm trading glitch on August 1, 2012. The firm lost $10 million per minute during the 45-minute fiasco that blasted out 4 million executions on 154 stocks and over 397 million shares of activity. The firm desperately sought financing and strategic options to stay solvent and eventually was acquired by Getco LLC to form KCG Holdings in 2013.

CDEL

Citidel Securities appointed Microsoft COO, B. Kevin Turner as the new CEO on July 7, 2016. The firm is massive global market maker in fixed income and securities. They make markets in over 7,000 U.S. listed securities and 18,000 OTC securities worldwide. The firm is largest options market maker in the U.S. responsible for 25% of all the executions on U.S. equity options and up to 13% of all U.S. stock trading volume. The firm is a subsidiary of parent company Citadel Investment Group, LLC, a private asset manager and hedge fund with over $25 billion of assets under management (AUM).

EDGA and EDGX

Originally founded as Attain ECN in 1998, Knight Capital Group purchased the assets and re-launched it as Direct Edge ECN in partnership with Citadel and Goldman Sachs and ISE. Direct Edge ECN platforms EDGX provided large rebates for liquidity providers while EDGA offered low-cost fees for liquidity takes. Combined the ECNs grew a 9-12% marketshare of U.S. equities trading volume in 2009 and tied with BATS for the third largest exchange in the United States behind the NYSE and Nasdaq. Direct Edge released On March 12, 2010, The SEC officially approved the conversion of the EDGA and EDGX ECN platforms to become national securities exchanges, which officially launched on July 21, 2010. BATS Global Markets acquired Direct Edge on January 31, 2014.