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Penny Stock Basics

How Do Market Makers Affect the Stock Market?

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Written by Timothy Sykes
Updated 4/18/2022 12 min read

Ever wondered who or what keeps the stock market running so smoothly? The answer: market makers.

Most traders don’t typically think about market makers. But understanding how they work is more important than you might think.

They do a lot to keep the stock market active. They’re often the reason our orders get filled as fast as they do.

Understanding what they do is part of learning how to be a self-sufficient trader.

I’ve even heard market makers say the best thing new traders can do is focus on how market makers operate and manipulate the stock market. Read on to find out if you agree…

(Listen to the SteadyTrade podcast crew talk with a former market maker here — it’s enlightening.)

What Are Market Makers?

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Market makers, aka liquidity providers, can be a firm or individual that gives traders and investors the ability to trade.

It’s more common for a market maker to be a brokerage house rather than an individual. That’s because of the size of securities needed to manage trades.

There are also specialized market makers known as designated primary market makers (DPM). They’re approved by an exchange and guarantee they’ll take a position in a specific security.

But the best way to understand what they are is to understand what they do.

What Does a Market Maker Do?

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They consistently quote two-sided markets by giving bids and asks for a certain security. This helps bring liquidity into the stock market and allow for smooth transitions into and out of positions.

Think of it this way … Without liquidity providers, it wouldn’t be easy for traders or investors to exit positions due to a lack of buyers in the market.

Liquidity providers help keep the market active. When you want to buy a stock, they have some available to you. If you want to sell, they’ll buy it back.

But there’s a caveat…

They only buy and sell if the trader’s willing to settle on a specific price. They’re in this for the money too. They’re the makers of the market. They largely control the supply and demand in the stock market. And supply and demand is the reason the market moves the way it does.

As a trader, it’s so important to study up on market makers. If you understand what they do and the power they hold in the stock market, you can use them to your advantage instead of your downfall.

Do Market Makers Still Exist?

Yep, they still exist. If they didn’t, the markets wouldn’t be near as liquid as they are.

I don’t think liquidity providers will ever go away. Especially with the insane volatility we’ve seen in the past year or so. No matter your opinion on liquidity providers, we need them. It’d be near impossible to find trading consistency without them — there wouldn’t be any trading patterns.

If you want to learn about some of the patterns I’ve found consistency with, check out “The Complete Penny Stock Course” written by my student Jamil. It compiles all of my favorite patterns in one place and teaches you how to take advantage of them.

How Market Makers Make Profits

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In short, they manage the bid-ask spread, which is how they make their profits.

The bid-ask spread is the difference between the asking price and the offering price of a security. It’s the difference between the highest price someone is willing to pay for a stock and the lowest price the seller will sell it for.

For example, when you look for the spread of a specific stock, you might see a bid price of $10 and an ask price of $10.03. That means the liquidity provider is buying the stock for $10 a share and selling it for $10.03.

Now that may not seem like much, but with high-volume trading, the small spread amounts to large profits for the liquidity providers.

You may not be a liquidity provider, but I think you can focus on profiting from your trades in a similar way — by aiming for singles instead of home runs. Singles can add up and if you manage your risk, you can grow your account over time.

In my 20+ years of day trading, I’ve found that taking singles is a great way to find consistency in your trading.* If you get caught up in the get-rich-quick mindset, the stock market can humble you FAST.

What’s the Difference Between Market Makers and Brokers?

Market makers are commonly brokerages that provide trading services for investors and traders, but that’s not always the case.

There’s a difference between the two when it comes down to the nitty-gritty.

Brokers are intermediates with the authorization to buy securities on behalf of an investor or trader. They’re licensed professionals who have the obligation to act in their client’s best interests.

Market makers, on the other hand, give liquidity to the markets. They keep the market active because they buy and sell stocks when others aren’t willing to do so.

However, sometimes a market maker is also a broker, which gives them an incentive to recommend stocks that they buy and sell. So do your due diligence and make sure you aren’t being manipulated by your broker … who could also be a market maker.

Do Market Makers Manipulate Stocks?

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Yes, there are a few ways they could manipulate stocks to get what they want.

One way they might manipulate stocks is by posting fake sizes to lure traders and investors into buying or selling a stock.

For example, they could post a big size in a stock. That could make traders think that the stock has a high demand and will push higher. But in reality, it’s just tricking traders into buying a stock for more than it’s worth.

Another means of manipulation is screwing traders over in their market orders. When you place a market order, market makers could fill your order at the highest price possible. Remember, they want to make as much as they can on your trade.

That’s why I don’t use market orders. I don’t like to leave anything up to chance.

Now, let’s go over some ways that you can use market maker manipulation to profit, so you don’t have to leave anything up to chance either…

How Traders Use Market Makers Manipulation to Profit

The most effective way that I’ve learned to profit from market-maker manipulation is to ride the momentum that comes from it.

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For example, if a market maker posts big sizes to make traders think there’s a lot of demand for a specific stock, you could potentially use that to your advantage. When more and more traders fall for the ploy and buy in, it will briefly push the stock higher.

Your job is to get in and out before the stock starts to fall.

You may only make a few dollars on the trade, but even a small win is still a win.

One of the biggest mistakes newbies make is that they’re too stubborn to take small gains. But guess what? I’ve made over $7.1 million from trading penny stocks by taking small gains.* I didn’t make it all at once. And you won’t either.

To me, true success in the stock market isn’t the ability to make millions on one trade, it’s learning how to become a self-sufficient trader and adapting to the market as it is. That’s how you can stay in the game. How bad do you want it?

Who Are the Biggest Market Makers?

GTS is the largest designated market maker (DMM) at the New York Stock Exchange. They manage nearly $12.5 trillion in market capitalization.

Some of the other big-name liquidity providers are BNP Paribas, Deutsche Bank, Morgan Stanley, and UBS.

You’ve probably heard some of these names before … They’re also brokerages that offer financial advisory services for recommending stocks and other securities. That’s part of how they will make money.

It’s also part of why I like to be real in an industry full of fakes. I know there are countless ‘gurus’ out there. And so many try to convince you to buy their alerts so they can capitalize from it.

But they don’t care if you’re successful or not. They just want to make money.

I want my students to learn to think for themselves. It’s why I created the Trading Challenge. I think it gives you the best chance of learning trading techniques that will help you become a self-sufficient trader. Apply for the Trading Challenge today if you’re ready to push yourself to be a better trader.

Now, let’s go over how to become a market maker…

How Do I Become a Market Maker?

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Becoming a market maker isn’t an easy task. It’s a time-consuming process. I’ll tell you the basic steps, but it’s not my expertise. Want to be certified, look for professional assistance if that’s your thing.

Here are the steps:

  1. Complete the registration form.
  2. Have your clearing agency contact the National Securities Clearing Corporation (NSCC) to confirm a clearing arrangement.
  3. Call the FINRA district office so they can check whether you qualify.
  4. If you qualify, the FINRA district office will send approval to Nasdaq’s Subscriber Services Department.
  5. A representative will then contact you for final steps.

The process seems a little too complex for me. I’ll just stick with my penny stock niche.

Market Makers: The Bottom Line

Market makers, or liquidity providers, consistently quote two-sided markets and give bids and asks for specific securities. They help keep the stock market active.

They’re always ready to sell stock and buy it back as long as you’re willing to settle on the price they’re offering.

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But they aren’t just there to make trading smooth. Remember, they want to make money too. And because of that, they can manipulate the markets to profit as much as possible.

That’s why it’s crucial to study how they operate. Learn how to take advantage of their manipulation instead of losing your hard-earned cash because of it.

Even though traders don’t typically study the ins and outs of market makers, it’s a big factor in helping you reach your goal of becoming a self-sufficient trader.

What do you think? Do you think about market makers while you trade? Let me know in the comments…


*This level of successful trading is not typical and does not reflect the experience of the majority of individuals using the services and products offered on this website. From January 1, 2020, to December 31, 2020, typical users of the products and services offered by this website reported earning, on average, an estimated $49.91 in profit. This figure is taken from tracking user accounts on Profit.ly, a trading community platform. Timothy Sykes has a minority shareholder interest in the platform.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”