The role of the Market Maker

When you begin trading any market you begin to understand that each Market Maker (MM) has a different role on Level 2. The most simple definition for a market maker is as follows:

“ A dealer in securities or other assets who undertakes to buy or sell at specified prices at all times”

Contrary to popular belief (we will get to the myths later). The MMs on level 2 have three roles:

1. Allow retail traders to buy and sell shares in a stock. “Retail” is used to describe people like you and me that are buying and selling floating shares to each other.
2. Allow debt-holders or company insiders to sell shares from the Outstanding share pool (OS) into the float. This is also known as dilution.
3. Create liquidity for a stock by tightening the spread, providing bid support, etc. Ultimately this part of the MM’s job is to feed into the second role above and keep you buying their dilutive shares.

Below is a quick cheat-sheet to help you understand the roles of some of the MMs you see every day when you are looking at Level 2.

Myths regarding MMs:

If you are anything like I was when I started trading, I began to buy into myths about MM behavior. Some classic myths include:

1. The MMs are just shaking the price to get cheap shares
2. Short MMs are assaulting the price (to get cheap shares)
3. When the MMs are done it will be ready to go back up
4. Don’t let the MMs steal your shares
5. You can’t beat MM algorithms
6. DA MMZ TRYIN TO SHAKE FOR DA CHEEPZ YUM YUM MORE SHARES FOR ME LOL WEAK HANDZ IMO #PennyGang #WhalesComingIn #10Bagga

These are things that I like to call “Bagholder fanfiction”. Dilutive MMs have absolutely no interest in getting more shares, the entire job of a dilutive MM is to sell as many as possible during times when retail traders are buying news or catalyst.

Other Myths:

1. You can’t dilute on a stop sign: This is false. Debt-holders do not care if a company has filed their quarterly reports on time or not and will sell into any volume that comes at any time.
2. You can’t dilute on a stock that has a “Q” at the end of a ticker because it is in bankruptcy: This is also false. If there were ever a time that people holding Outstanding Shares needed to unload as quickly as possible, a company filing for bankruptcy protection would be it.
3. If there are no dilutive MMs on Level 2 there is no dilution: Unfortunately this is also false. Dilutive MMs generally represent toxic lenders that route through these broker-dealers. There are instances in which insiders/family members/etc. have been given shares by the company that are being sold through their personal retail account. You need to trust your chart to see the dilution more than you trust Level 2.

The biggest lesson I have learned in trading is that companies become publicly traded for one reason and that is to raise money by diluting. Avoiding dilutive MMs as a trading strategy is not viable as the ones that need to dilute the most often have the most liquidity thanks to the assistance of the MM. Trust your chart, trust your catalyst and trust your share structure (while it lasts).