Reading 44: Making vs Taking a market

Would you please explain me taking the market with an example of Limit order book? A limit order book is shown on page 46. Would you please explain taking the market with this example and distinguish it with making a market?

Thanks in Advance!

Assume the bid-ask spread is 30-40. If you place a limit sell order below the best ask (39) or a limit buy order above the best bid (31) you are making a new market because there is a new bid-ask spread created by your order(s).

If you are putting a limit buy at the best ask or a limit sell at the best bid you are taking the market. You are essentially also taking the market if you place a limit buy above the best ask or a limit sell below the best bid because you trade will most likely execute immediately. It is like a market order.

and what making the market then?

From above, this is making the market:

Market making can also mean a broker who holds a bunch of stock on its books. But it looks like in the context you’re talking about here, the nuance is whether you’re placing orders at the bid-ask level (taking the market as you find it), or whether you’re placing orders different/worse the bid-ask level (making new market prices).

Well, that not really my point I guess. There is some difference between making the market and making a new market
I do understand that new referee to prices between the current bid and ask price (like in the example above). That leaves me wondering what making the market is

Buddy it is as explained above. But perhaps this can also add some color:

The best bid and ask (highest bid and lowest ask) make the market. This is the definition of making the market for the purposes of limit order books.

What the above answers are saying is that making the market is not a static thing. It rolls with the flow of bid/ask orders as they come through. What is “at the market” one minute can be “behind the market” the next minute.

Taking the market simply means you as a trader (or investor) agree to do a trade for a stock within the market-offered bid/ask levels. For example if the best bid (buy price) for a stock is $30, and you agree to hit that bid (sell at $30), you’re taking the market. Your order is completed at market price level. Similarly if you are a potential buyer of a stock and the best ask (sales offer price) is $30.50, and you agree to lift that offer (buy the stock from the market at the $30.50 asking price) then you’re taking the market.

If you hold the stock and really want to sell it, and the current asking price is $30.50 but you decide to offer it instead for $30.25 asking price because you’ve got a big block to sell and you’re worried more about the speed of sale than you are about getting a higher price, you are offering a new best offer price to the market and you’re making the market. Or if you really want to buy a lot of a stock as quickly as possible and you’re more bullish on the stock than your peers, you can offer the market to buy the stock at $30.25 instead of the current $30 best bid price. You’re offering more than the market had been offering before you placed your bid order. You are, again, making the market in this case.

A limit order book is simply a summary of the bid and ask prices for a stock trading on an exchange, that is used to match buyers and sellers. The best (highest) bid price and the best (lowest) ask price, from that whole list of bid and ask prices, make the market. Everything worse than the best bid and ask are “behind the market” prices. But what constitutes the best bid and ask price can change on a rolling basis during a typical trading day for a liquid stock.

There is also the distinction between standing limit orders and market orders when it comes to making and taking markets. Standing limit orders are simply standing public bid/ask prices offered by buyers/sellers for a stock that are left open for the market to regularly take them up on. You can look them up on bloomberg and trading terminals. They are the public buy and sell levels some large players want to broadcast. These are used to make the market because the best standing limit orders (best published bid/ask levels) often form the basis of the best bid and ask prices, thereby making the market. So if you’re looking at a graphic on page 46, these might be a list of different standing limit orders you’re looking at. You’re possibly looking at different published bid/ask prices for XYZ stock as set by the standing limit orders of some large buyers/sellers placed through their traders/brokers, who are regularly in the market for the particular stock and want to broadcast their buy/sell prices for the public to take them up on. These large buyers/sellers will freely buy or sell the stock at the standing limit order bid/ask prices until such time that they eventually may close out those orders.

Market orders, on the other hand, are used to take the market. They are what I described a few paragraphs above, where you give an order to your trader or broker to buy or sell XYZ shares at the market price, which is defined by the best bid/ask in the market at the time you give your order. You’re simply telling your trader or broker to buy or sell some amount of XYZ shares at the current market level (as it may be) for some specific period of time. Such market orders can be left open for a short fixed period of time, or the entire trading day, or a few trading days etc. You simply take the market as you find it, with market orders. If you have an online stock trading platform account, for example, and you want to buy Apple stock, then your platform will show you what the best ask price is at the time of your order. If you look at the ask level and agree it’s generally fine, you can then execute a market order to buy however many shares of Apple you wish. You’re saying give me Apple shares today at the market price it’s trading at. A limit order, on the other hand, would be one where you say you’re fine to buy your amount of Apple shares at any price equal to $X or cheaper. While you’re capping your price ceiling to buy Apple shares, you’re also risking not executing your entire order if the market moves higher than your limit price either before or during your limit order hitting the market for execution. So market orders have some pricing risk while limit orders have some potential risk achieving completion.

Cheers man

Thanks for the lengthy explanation!
I probably should just have posted a screenshot before already.
So according to your explanation, there is no difference between B and C, its rather a little twist of the CFAI?

Here B and C are red herrings because you are taking the market. You are agreeing to sell at the existing market bid level. That is the trick they are trying to see if you catch on to in this problem.

In theory, if you are the only standing limit order offering at 54.71 (say it’s a penny stock and not super liquid but you make market on it), and your standing limit order is open for a month without anyone offering less, then you started by making a new market but then eventually just are making the market. Because a standing limit order is like a billboard standing there on the roadside.

If the question above said the bid price was 54.60 and not 54.62 and the rest of the question was worded identically, then the answer would be C. But, if you left that order open for a month and nobody offers lower than you during that period, you would say you initially made a new market by lowering the ask price with your standing limit order (and therefore lowering the bid-ask spread), but after that you are continuously making the market by regularly selling stock at that level to all interested buyers that month.

Does that make sense? Cheers

yes it does, many thanks!

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When you “take a market”, you are placing an order at the existing offer price or market price. When you use the limit order option, you’re order will be executed at lower of offer or market (given that there are sellers willing to sell you the required amount). When you “make a market”, you are essentially creating a new bid-offer range and this is generally done by market makers or dealers who profit off the spread.