The Specialist

There is one actor in the stock market that I have not mentioned yet.  This is the specialist or the market maker, if you will.  For each stock out there, there is a specialist assigned to it.  The specialist has a very complex job.  I will try to explain it as simply as possible here for all to understand.

The market is such that when a stock is being sold, its price will drop.  This leads to more selling.  If a trend like this gets out of hand, it can be very dangerous for that company.  A specialist gives their respective stock holdings liquidity and decreases any disparities between buying and selling.  If a stock is being continuously sold, the specialist will step in and buy shares.  If it is being bought, the specialist will sell.  This is done so that specific stocks receive enough volume to do business, and also to stabilize share prices.  In short, the specialist ensures that a stock is traded steadily and that it’s price doesn’t jump or drop out of control.

In the New York Stock Exchange specialists have some unique characteristics.  For one, the specialist is a registered broker-dealer for a specific company’s stock.  They execute orders for other floor members, charging a small brokerage fee for each transaction just as a brokerage house would.  They also buy and sell stock with their own money, hoping to profit from their own trading.  This provides increased liquidity, as mentioned above.  A specialist, however, must always act in the best interest of their given stock.

If a trade can not be executed immediately, floor personnel will leave orders with the specialist for them to execute it “on the books.”  This happens often with limit orders where the current stock’s price is away from the specified price of the trade.  A fee is charged for these trades once they eventually take place.

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