Banks Can Outsource Their Trades

If you are a retail stock investor in the US, you have a broker. Your broker is a company — Robinhood or Charles Schwab or E*Trade — that is in the business of having account relationships with retail investors. It advertises to attract your business, it has a nice website and app for you to make trades, it accepts transfers from your bank so you can buy stocks, it sends you account statements and keeps track of your stocks for you.

But what the broker typically does not do is trade stocks for you. If you want to trade stocks, you go to your broker’s app and click the buttons for “buy 100 shares of XYZ,” and the broker’s computer gets the order, and then it ships the order out to someone else, some different company, called a “market maker,”1 whose job is to get you the stock at the best available price. Sometimes this will involve sending your order on to the New York Stock Exchange, or some other trading venue: The market maker buys 100 shares of XYZ on the exchange at the market price and then hands them over to you. Often, though, the market maker will instead sell you the stock out of its inventory: It is in the business of trading stocks for its own account, so when it gets your order to buy 100 shares of XYZ, it will sell you 100 shares of XYZ as a principal, charging you slightly less than the market price on the exchange.