Market Maker Corner: Market Making

MaRkET MakiNg pAyment for ExPlaiNED order flow

What is a Market Maker firm? Explain the process including “taking At Glendale Securities, Inc., we mainly make markets in OTC a house position”. securities for our customers. We charge our customers a commission for execution and use our market making capabilities to facilitate customer executions.

There are wholesale market makers, boutique market makers, and other types of market makers. Wholesale market makers obtain order flow from other broker dealers who do not We are often asked why we don’t offer commission free trading like some of the online retail brokerage firms offer. Wait, have internal market making desks. Wholesale how can a broker dealer offer commission free market makers profit by the vast volume of orders trading? The answer to that question requires a received by taking the other side of from the orders discussion on the practice of payment of order flow, sent to them by the referring broker dealers. The and a clarification on when payment for order flow positions that wholesale market makers take are is paid to brokers. Many large retail brokerage firms usually held for a short period of time, possibly even including the online ones you are probably familiar just for a few seconds. Boutique market makers with do not make markets in stocks. To fill your typically make markets in securities to facilitate their order, brokerage firms have a couple of options, customer’s orders. When a boutique market maker each with their own cost/profit structure. They can like Glendale takes a house position, it is often for a longer period of time. There are some positions that Glendale has held for over 2 years. send your order to an exchange or ATS, but those often charge the broker on a net basis for execution. They can execute the order internally as a market maker, but that requires staff, technology, and risk capital that may be too cost prohibitive. Another option is to send customer orders to a wholesale market maker who pays the brokerage firm for its order flow. If you must choose between the three options outlined above, receiving payment for order flow for sending orders to a wholesale market maker seems like it’s the smartest option for the brokerage firm. The brokerage firm eliminates costs, doesn’t

WHAT SERvICES DOES gLENDALE OFFER COmPANIES?

Glendale makes markets in OTC securities, files form 211 to begin or resume quotations on OTC companies, obtains DTC Eligibility for issuers, and opens retail client accounts with a focus on customers who would like to deposit OTC securities in their account. Many broker dealers will not take OTC securities for deposit. Would you say that Glendale is a full- service firm? If not, how would you describe it? Boutique? Glendale is a boutique firm that specializes in assisting clients in depositing and trading OTC and small cap listed securities. Part of the process in assisting these transactions is the filing of the form 211 and obtaining DTC Eligibility for issues that our clients are depositing with us. If the issuer is not DTC Eligible, and there aren’t publicly available quotations, we cannot take orders or deposits from clients. Therefore, to facilitate our customer’s orders we file for DTC Eligibility and file form 211 applications.

CAN A RETAIL INvESTOR OPEN AN ACCOUNT?

Retail investors can open an account, deposit their securities, and if applicable Glendale will make a market in the security that they intend to trade in to facilitate their orders.

CAN INvESTORS BUy AND SELL mICROCAP STOCKS AT gLENDALE?

yes

WHy IS IT SO DIFFICULT FOR INvESTORS TO TRADE mICROCAP STOCK AT ANy BROKERAgE FIRm? ARE THERE SPECIFIC RESTRICTIONS OR IS IT AT THE DISCRETION OF THE BROKERAgE FIRm?

The securities that are tradable is at the discretion of each brokerage firm. Strict regulations on OTC trading and deposits have caused many broker dealers to exit the business entirely, rather than deal with the additional compliance requirements.

HOW HAS REgULATORy OvERSIgHT AND NEW RULES ImPACTED mICROCAP TRADINg?

We think that microcap trading has been impacted by heightened regulatory oversight over the past several years. Many brokerage firms have now turned off all trading in OTC securities presumably due to the strict regulatory oversight. There are large online firms that don’t allow any trading and large full-service firms that don’t allow any OTC trading. Compliance departments at these firms claim that microcap stocks are illiquid and can be easily manipulated for fraudulent purposes. While this may be true in part, there are better ways than turning off trading to deal with these issues. Ironically, as more firms turn off OTC trading, it will likely further decrease liquidity. Regulators should take notice that if they overregulate this business, more and more brokerage firms will exit the business instead of dealing with overburdensome compliance requirements.

HOW WOULD yOU BEST DESCRIBE THE DAILy ACTIvITIES OF A mARKET mAKER?

Market makers directly represent quotations without going through an intermediary, bids/offers for client and firm interest in a security. During that quotation process, market makers take positions both long and short in a security in the regular course of making a market.

WHAT DIFFERENTIATES gLENDALE FROm ITS PEERS? ARE THERE ANy PEERS?

There are surely peers depending upon the metrics one uses to compare dealers. However, Glendale believes that it differentiates itself from other market makers by taking a long-term interest in its client’s securities when it facilitates the execution of orders.

IN gENERAL, WHAT FACTORS DETERmINE yOUR BID AND ASK PRICE OF A STOCK yOU mAKE A mARKET IN?

Client orders are the primary driver of bid and ask prices. The firm will also represent its interest at certain levels, but typically we will be more active when we have more orders to represent.

HOW DO mARKET mAKERS INTERACT WITH ONE ANOTHER?

It’s not uncommon to have 2-3 wholesale market makers, a couple of boutique firms and a couple of ATS entities registered in an OTC security. An active security will usually have over 5 MPIDs registered.

WHAT’S THE DIFFERENCE BETWEEN AgENCy TRADES WITH COmmISSION OR PRINCIPAL TRADES WITH A mARKUP/mARKDOWN?

As a dealer we can either send the order to another dealer or ATS for execution acting as an agent, or we can execute the trade as a principal internally. Some clients think that acting as agent is better because the firm is not trading against the order. However, its often misunderstood that regardless of how we execute the order, we are required to provide best execution to the client. In addition, we are not allowed to trade for our own account at a price and size that could execute a client order unless we simultaneously fill the client as well. Ultimately, we are making markets to facilitate client orders, not to make more money off the same order.

HOW DOES A mARKET mAKER mAKE mONEy TRADINg STOCKS?

We make markets primarily to facilitate our customer orders. We make commission or a markup/ markdown (which is charged at the same rate as a commission) on the trades we execute. Sometimes we take positions in stocks that we make a market in and sometimes we profit or have a loss when the security increases or decreases in price respectively.

For more information: www.GlendaleSecurities.com