Before electronic markets, there were people who acted as market makers. I understand that they made lots of money because that could buy at the bid and sell at the ask. My question may be naïve but with all electronic markets, do the exchanges now make the money on the bid/ask spread that used to be made by the market makers? Further, is there any inherent reason, other than to make money, for the exchanges to have separate bid and ask prices? Could there just be one price?
too lazy to explain this, someone needs to step in... but retail traders CAN buy the bid and sell the ask.
Most stock exchanges operate on a "matched bargain" or "order driven" basis. In such a system there are no designated or official market makers, but market makers nevertheless exist. When a buyer's bid price meets a seller's offer price or vice versa, the stock exchange's matching system decides that a deal has been executed. [edit] New York In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as "specialists", who act as the official market maker for a given security. The market makers provide a required amount of liquidity to the security's market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders. This helps prevent excess volatility, and in return, the specialist is granted various informational and trade execution advantages. Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to naked short a stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting. Recent changes to the rules have explicitly banned naked shorting by options market makers. There are over two thousand market makers in the USA[2] and over a hundred in Canada.[3] Taken from Wikipedia. All exchanges have what is called "listing fees" which are paid by corporations to have their company traded on that given exchange. All members of the exchange must pay dues to the exchange to have the privilege to be a member, which is used to cover some of the expenses of running the exchange. There are transactions fees that must be paid by the members for executing trades on the floor, either for themselves or for others. Firms must pay exchange fees for use of the exchange facilities in providing quotes and updated transactions. These fees are paid both by members and those vendors that have been approved to use such information. The exchanges act as primary regulators for their members, and as such charge for all extensions of credit requested by the firms on behalf of the general public. There are on occasions when members violate the rules and/or regulations of the exchange or other regulatory agencies and for doing such are fined and in most cases the fines are a substantial amount of money. Although the exchanges were not founded to be profit making organizations, they do make some profits. However, the cost of running an exchange is extremely high, so the profits are never that great. Takem from Yahoo
I don't think that is the case. The exchanges (I assume you meant ECNs like ARCA) make their money by charging the market participants X cents per shares trading on their exchanges. e.g. I need to pay ARCA 0.3 cents per share if I buy/sell my equities through them. The costs add up when the shares traded are sizable. The ECNs are not playing market makers because they don't carry inventory (and thus risks). They take their cut no matter who wins. The ECNs are only match makers. Anybody can send a limit-price order to the ECNs. e.g. your want to buy MSFT at X or sell CSCO at Y. But these orders will not be displayed on level-2 until the national inside ask/bid are posted as such.
The orders are displayed as soon as they're sent... it's called depth of market. And the ECNs only make a small fraction of what you pay; if you pay .3 cents to take on arca, the guy on the other side gets a rebate of between .21 and .30 cents, depending on his firm's volume.