Make the Market vs Make the New Market

Hi all,

What is the difference between Make the Market and Make the New Market

When you set your new bid or ask in the market, you are making the market.

When you set your bid or ask within bid-ask spread you are making the new market.

When you sell or buy stocks at available bid or ask, you are taking the market.

regarding Making the market … assuming

Bid: 49, 50, 51, 52
53, 54, 56, 57 Ask
does making the market mean:

  1. Setting a new bid at 50
  2. Setting new bid at 50.50 because 1) is already available in the market, therefore taking the market

Making the market means you are providing the best bid (or ask) price for a stock, often via a standing limit order. If the current best bid for XYZ is $50 for a stock, and a large market player enters a standing limit order with their brokers or trader to buy the stock at $50.10, then they are making the market until such time that some other player issues an even higher bid price amount. Then that new player is making the market and the $50.10 bid price that used to make the market is now behind the market.

Taking the market means you are giving your broker a market order instruction. You hold stock XYZ and the current best bid for the stock is $50. That approximate price range seems fine to you. So you give a market order to sell your XYZ stock at the market price level ($50 in this case). You are agreeing to take the market price for the duration of your order, unless you give a later instruction to your broker to pull or close out the order (cease it) before it fully completes. If you have a large block of XYZ stock that you’re looking to buy/sell, the market price may fluctuate a bit during the period your market order is open. So the actual price you pay/receive for buying/selling the XYZ stock via your market buy/sell order will be equal to the average market price your trades executed at during the market order’s period of validity.

Why would you give a market order, and leave yourself open to adverse price changes? Because you really want to complete the order, and the priority of completing the order trumps the price factor in your view. For example, if you feel that XYZ stock will really grow soon and hit the moon, or it will significantly decrease in price soon, then getting your entire buy or sell order done may be more important to you than paying a little more (or getting a little less) during your buy (or sell) trade.

Why would you give a limit order? Because the price of the stock is important to you. Maybe you aren’t super bullish or bearish on a stock. Or maybe you are bullish/bearish but only to some fixed price level. Then you would give a limit order. You risk the order not completing fully or at all. Because for liquid stocks in particular, the stock may move outside your limit price either at the beginning of your trade or sometime during your trade as it completes. But, let’s take an example where you are very bullish on buying a large block of XYZ stock and your internal target price for it is as high as $55. It’s trading at $50 now. You may enter a series of limit orders through your broker at slightly higher prices than the current bid price, say you enter an order at $50.05 or $50.10 or something like this. In this instance, your bid of $50.05 or $50.10 is the best bid in the market and you are in fact making the market for stock XYZ.

The seller who sells their XYZ stock to you at your bid price is taking the market (taking the market price as offered by you).