Here's the lowdown on how to get the best out of market makers.
In Haggle Your Way To Cheaper Shares last week I encouraged you to step back into the genteel age of ironed newspapers and toast racks and get on the phone to your broker instead of dealing online. You can then name your price for the broker to relay to the market makers. Unfortunately since you are not allowed to make a midnight visit to Merrill Lynch with a petrol can and a box of matches, this will be an offer they can refuse.
If the share is illiquid or you want to make a large trade, the market maker may offer to fill only part of your order at your limit price and/or fill the whole order at a higher price (if you are buying). If it's the former you now have four options:
- Decline.
- Accept the part fill, and wait until later (at least 30 minutes is market etiquette) to try for more.
- Leave the whole order with the market maker for the rest of the day, or 'work the order good for day (GFD)' in Cityspeak. You can specify a different period.
- Get protection for the part of the order they can fill now and work the rest GFD at your limit price or possibly at a higher price.
If you go for the protection option, even if the rest of your order isn't filled or the price changes, you still get the protected quantity at the initial price. The advantage of using protection instead of simply making a trade for the first part and a second for the worked order is that you incur only one broker fee since only one trade is made however many shares you buy.
You may wonder why the market maker doesn't save everybody a lot of trouble and just sell you all the shares you want in one go. You couldn't go to Sotheby's and buy a Picasso for £15m (well, I couldn't anyway, cash being a bit tight after a trip to Aldi's) then say you'd like another five at the same price. The auction house would love to have the commission but they don't know if they'd find any more at the same price or less.
Market makers don't hold a lot of shares in any one stock because they'd be mixing investing with providing liquidity. They'll gladly sell you the stock they have and maybe a bit more i.e. they may go a little short for a while, but any more than that and they'd be selling at risk. This is the reason they'll usually quote a higher price for selling substantially more than the normal market size -- to compensate for the risk they are taking on. If you get them to work an order, you are taking the risk that you'll get none. As always in the stock market, certainty has a price.
There's more about how market makers work and a lot else in Dominic Connolly's excellent The UK Trader's Bible. Read our review here.
