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Day Trading Online – What You Must Know Before You Begin – Part 3

In The New York Stock Exchange, The Market Makers or Specialist as they are called help to maintain the smooth flow of buying and selling within the market place. In order to provide this service they make their money through the spread they create between what they buy stocks for and what they sell it at.

The market makers will set a price for what they will buy stock XYZ and how much they will sell the same stock for, this is called keeping a two sided market. So in effect the specialists will earn their profits from keeping a spread, that is the price at which they will buy stocks from the public is always a bit lower than what they would sell the same stock to investors thus making profit.

An example of this is buying stock XYZ from the public at 205 and then selling it back to investors at 205 1/4. The price that they bought stock XYZ fro is called the bid and the selling price is known as the ask. The difference between the two is known as the spread. The spread is usually determined by how volatile the marketplace is at any particular time. If the spread is considered wide, it means that the difference between the buying price or bid and the selling price or ask is large and this usually indicates a volatile market place for this particular stock. This is where the specialist will really make money.

An example of how much money a market maker can make in a day in a calm market will be if they bought stocks from the public for 25 and then sell it back for 25 1/8 this 1/8 point is equal to 12.5 cents per share on each trade. The average market maker will trade about 1 million shares per day easy, that will be $125,000 in profit in one day. This is how a few cents per share for the spread can turn into millions of dollars in just week of trading.

So as you have learned the bid ask spread is the market makers way of profiting from the trading public. So what about the day trader, how will we make our money? Buy trading in the best of all the positions mentioned above. Using the market makers strategy to our advantage.

There are rules within the system to force the specialists and market makers to allow priority to customer’s orders over their very own. So a day trader can take the same side of the trade as a specialist would in fulfilling the buy or sell order of a customer placing a trade. So as a day trader we can exploit the same house edge advantage as the specialists by taking the opposite side of any customer’s order within a trade. So the day trader will make the same small but profitable trades on the spread on buying and selling stocks.

Day traders are in a unique position because they can operate like a specialist without risking millions of dollars by holding inventory of stocks, that can turn south at any time, but can take the other side of the trade as the public buys and sell stocks throughout the day.

The real trick is in identifying the trends that the specialist have forged and exiting the trade with a profit before your spread vanishes into thin air. This comes with experience and knowledge as to how the system works, and you should gather and learn all you can about the system before going into any trade.


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