How brokers avoid the tricks of market makers

Nasdaq is more effective than other major stock exchanges because it uses lightning-fast computer links, usually open outcry models. But the process used to execute Nasdaq transactions is far from perfect. Nasdaq also provides a way for market makers who make a living trading Nasdaq stocks to deceive brokers and investors into thinking that they are getting the best price when they actually don’t.

Here are some tips and gimmicks used by market makers.

Tip #1: Provide false dimensions

When a transaction enters the trading floor of the New York Stock Exchange (NYSE), it is immediately sent to an expert on that stock, who may have limited interest in a single transaction.

Experts are overwhelmed by traders and just want to find a buyer or seller for the transaction as soon as possible. In essence, the expert is an intermediary who sometimes holds stock positions, but in fact it functions as a liquidity provider.

Key points

  • Market makers may buy your stocks for their own accounts and then flip them a few hours later to make personal profits.
  • They can use the rapid price fluctuations of stocks to record profits for themselves in the time interval between order and execution.
  • Using market orders instead of limit orders will make your trades easier for market makers to take advantage of.

In contrast, Nasdaq market makers usually establish long and short positions in stocks and then turn them into profit or loss later in the day. They also provide liquidity, but they are more focused on taking advantage of your large stock by buying shares for their trading account and then transferring them to another buyer.

In any case, market makers sometimes post false sizes to entice you to buy or sell stocks.

For example, a market maker might publish bids and bids as shown below:

$ 1 0-$ 1 0. 2 5 (7 5 × 1 0) $10-$10.25 (75 times 10)


This means they will buy 7,500 shares (multiply by 75×100) of your stock at a price of $10 per share and sell 1,000 shares at a price of $10.25.

According to Nasdaq rules, they are obliged to comply with these scales. However, the market maker may own a position in the stock. The release of an offer for 7,500 shares is an attempt to deceive brokers and investors into thinking that the demand for the stock is high and rising.

Nasdaq is known for providing market makers with ways to trick brokers and investors into thinking that they are getting the best price.

This activity is opposed by the Financial Industry Regulatory Authority (FINRA), but it is still quite common in practice.

If someone tries to sell 7,500 shares to a market maker, they must accept the purchase because the bid has been posted.

How it works

So what will happen? Most brokers will pay $10.25 in stocks to complete the transaction. But in fact, the purpose of the high bid is to sell 1,000 shares of the market maker at a price of $10.25. The trick worked!

By the way, the same technique can be used in turn for the seller of the equation. The market maker may offer a high price, such as 10,000 shares. The broker sees this and believes that the market maker is seeking to sell a large number of shares. They quickly sell the stock at the purchase price ($10 using the example above).

In this case, the technique worked again because the market maker tricked the broker to sell the stock for $10, which is exactly the price the market maker wanted.

How to avoid this trick: Observe stock trading before buying or selling stocks. Know the players in the stock. By watching the actions on the level 2 or level 3 screen, you can know who is accumulating or uninstalling them. This will enable you to better understand whether the scale published by the market maker is true.

Tip #2: Ticket switch

To enter an order, the broker usually fills in the order form and gives it to the clerk. In theory, the clerk executes the order or hands it to the trader. In doing so, the clerk gets the broker’s ticket, timestamps it, and then tries to execute the transaction.

While this process is going on, the market is also changing. In the time the broker delivers the ticket to the clerk, a stock may go from $10 to $10.12 to $10.25.

How it works

Some clerk will take the ticket, notice that the stock is going up, buy his or her personal account at $10.12, and then turn around and sell it to the broker who initiated the order at $10.25.

What happens if the stock drops to $9.75 immediately after the clerk buys it? This is illegal, but the clerk can take the physical ticket, switch the account at the bottom, and then tell the original broker that the stock was purchased for $10.12.

By the way, market makers use the same trick to buy and sell stocks for their accounts and use your transactions as a cover.

How to avoid this trick: Brokers should watch their order entry staff place an order and wait near the order window to see if they “get a deal”. If the transaction is done electronically, please immediately contact a trusted order clerk or market maker, or both, to check your execution price. Also observe the trend of the stock to ensure that no one is profiting from your trading.

Tip #3: Stay ahead of market orders

The broker who placed the market order for the stock is issuing an instruction to buy the stock any The current price is. For unscrupulous market makers, this could be a lucrative order.

Using the same example as before, suppose the published citation looks like this:

$ 1 0-$ 1 0. 2 5 (7 5 × 1 0) $10-$10.25 (75 times 10)


A market maker hit by an order may sell 1,000 shares at a price of $10.25, then 500 shares at a price of $10.30, and so on. However, if your market order falls in a basket of pending orders, then you are giving full authority to the market maker.

In other words, you are willing to pay any price to buy this stock. And you will.

In most cases, the market maker will ensure that you trade at a high price, and you don’t even know it happened.

How it works

This is how it works: You watch the stock go higher and assume you are last. In fact, the market maker saw your order from a long list of orders and simply increased the offer to take advantage of your discretionary mandate.

What works for you is the time and date stamp on the physical ticket. This electronic statistics of running bids and quotations helps limit the occurrence of such incidents. Moreover, these behaviors are monitored within the company and may be subject to random checks by regulatory agencies. Despite these safeguards, it is difficult to prevent or prove this technique in high-volume stocks.

How to avoid this trick: Don’t place market orders. Use limit orders. In the example above, your order should sound like this: “Purchase 1,000 shares of XYZ stock at a price of $10.25 or higher that day.” This means that the maximum amount you will pay is $10.25, and the order is only Effective on the trading day. It gives market makers less opportunities to manipulate you and your customers. Of course, this also means that if the price exceeds your limit, you may miss your order.

After all, market makers are trying to make money. That is their job. Your job is to follow your order as soon as the transaction is completed. In the long run, you and your customers will be happy for what you have done.


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