Question

1. How does a crossing system differ from an electronic exchange?

2. What is a specialist? What is a market maker? When trading, what advantage do the two have over you?

3. Describe some alternatives to trading on the main stock exchanges

Answer 1

1.

Crossing system: A crossing system is an alternative trading system (ATS) that matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market , such as electronic communication network which displays public quote. This means that the dealers initiate buying and selling of stock without using stock exchange.

Electronic exchange: It is a security exchange system whereby the buyer and seller of of securities do not meet to initiate buy and sell process. Such trading takes place through computer systems and is electronically possible from almost everywhere.

Crossing system is different from electronic exchange since the crossing network does not take place on a stock exchange. Infact in crossing system, the buy and sell order are offset without being recorded on exchange. While the electronic exchange takes place on stock exchange where all trades take place through electronic trading platforms. Electronic exchange is more simple and user friendly for traders and investors.

2. Specialist: A specialist is a member of a stock exchange who acts to neutralise the demand and supply of a stock. He also acts as the market maker to facilitate the trading of given stock.  

If there is a large shift in demand on the buy or sell side, the specialist steps in and sells off his own inventory as a way to monitor and control large movements and to meet the demand so as to reduce the demand supply gap. A specialist is someone who is entrusted to hold an inventory of the particular stock, post the bid and ask prices, manages limit orders and executes trades for monitoring and controlling demand and supply of a stock.

Market makers:

A market maker are generally banks or brokers that quote both buy and sell price of a financial instrument or commodity with the intention to make profit from the bid- ask spread. Market makers are openly competitive and facilitate competitive prices; as a result, investors generally will get the best price. The market maker in general adds to stability, liquidity and transparency of financial markets.

The market makers and specialists deal in huge quantities and thereby can neutralise the market in their favour to a certain extent. As an individual we do not have access to that huge amount funds or the stocks to compete in and influence the market solely form our personal investments. Sometimes market makers also have access to naked shorting i.e. short selling a stock without first borrowing the security.

3.

An alternative to trading on main stock exchange could be "Over the Counter" known as OTC where dealers act as market makers by quoting buy/ sell prices for stocks, currencies and other financial products.