Market MakeHer Podcast 16. What Are Dark Pools, PFOF & Market Makers?
Oct 18, 2023
Delve into the mysterious world of market makers and understand their vital role in trading. Discover what dark pools are and why they serve as secretive venues for large orders. Learn about the intricacies of NBBO, bid and ask prices, and how high-volume stocks maintain tighter spreads. Find out how payment for order flow impacts execution quality, and explore the regulatory landscape surrounding these trading practices. The discussion reveals both the advantages and risks associated with dark pools, sparking important conversations about market transparency.
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NBBO And The Spread Explain Price Display
- The NBBO (National Best Bid and Offer) shows the best available buy and sell prices before execution.
- The spread (ask minus bid) reflects market liquidity and who makes the market, like market makers.
Market Makers Earn Spreads, Not Market Bets
- Market makers (wholesalers) display bids and asks and earn the spread by taking the other side of trades.
- They aim to stay delta-neutral and profit from trade volume, not market direction.
Use Execution Data To Evaluate Brokers
- Check execution quality if you care about getting better-than-quoted prices (price improvement).
- Use brokers' Rule 606 reports to compare where orders route and how much price improvement customers receive.