This means investor trades wouldn’t get fulfilled as fast-and every second counts in a fast-moving market. For one, they say, it creates a conflict of interest between brokerages and market makers.īecause market makers pay for brokerage’s orders, a brokerage could hold onto orders and wait for the highest offer from a market maker. Why the Controversy?Ĭritics of this financial practice say it hurts investors.
However, this practice is controversial for a few reasons. Market makers may pocket $8 of them but return the remaining $2 to you. What happens with the $10 difference? You, the investor, shell out the $10. That’s a $1 per share difference, or spread, totaling $10 for all 10 shares.
Generally, the ask price is slightly higher than the bid price, which is known as the spread.įor example, you may bid $10 a share for 10 shares of stock, but the market maker found a seller asking for $11 per share. It looks for an appropriate ask price, or what sellers would be willing to sell. This requires the market maker to do some digging. The market maker must then look for someone selling 10 shares of stock at that price. That’s known as the bid price, or what you’re willing to pay for the stock. Say you’re looking to buy the 10 shares of stock at $10 per share. The Bid-Ask Spread DilemmaĮxecuting a trade is easier said than done. This can involve looking for the best price on your trade or filling your trade quickly. They then look for the best execution of your trade. Market makers pay brokerages to place these orders.
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