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In the UK a principal broker dealer may also apply to the London Stock Exchange (LSE) to register as a market maker in particular shares. »Ê¹ÚÌåÓýapp market maker has to register on a share by share basis and for larger companies there may be several market makers competing with each other for business.

»Ê¹ÚÌåÓýapp role of a market maker is to ensure that there is always “a marketâ€� in which investors can buy and sells shares in the companies for which they are a market maker for.

»Ê¹ÚÌåÓýapp principal obligation of a market maker is to publicly quote a two-way price per share for each share they are registered as a market maker for. In the UK this is done using a computerised screen based Stock Exchange Automated Quotation System (SEAQ). (SeeSTSM122020).

For example, a share might be priced at:

240p - 244p

»Ê¹ÚÌåÓýapp lower price (240p) is called the bid price and is the price at which the market maker will buy the share from other brokers. »Ê¹ÚÌåÓýapp higher price (244p) is the offer price, the price at which the market maker will sell the shares to other brokers.

»Ê¹ÚÌåÓýapp difference between the bid and offer prices is called the ‘spreadâ€� and this is the basis of the market maker’s profits.

Having made an investment decision a broker will undertake the deal with the market maker over the telephone. Market makers are obliged to deal whenever requested by other brokers and cannot refuse a transaction.

In return for accepting the obligations of acting as a market maker firms gain the following privileges:

• Only market makers are allowed to input prices on SEAQ
• »Ê¹ÚÌåÓýappy are exempt from SD/SDRT on purchases
• »Ê¹ÚÌåÓýappy are able to borrow securities to cover short term positions through the stock exchange money brokers
• »Ê¹ÚÌåÓýappy have access to the inter-dealer broker network which allows them to buy and sell large volumes of securities anonymously

Market makers may also use the SETS system (STSM122020) to place orders to buy shares.