Do Market Makers Still Matter?

09/26/2011 8:00 am EST


Fausto Pugliese

Founder and President, CyberTrading University

More market makers are not as visible on level II, says former market maker Fausto Pugliese, who explains that retail traders have now gained a valuable edge in the marketplace.

I’m here with Fausto Pugliese. We’re talking about market makers and their influence on pricing these days. 

So, Fausto, you’ve seen a change over the last few years with the market makers. It used to be that they were the ones to watch in terms of pricing, but what is the environment now? 

Well, what’s happening now, I’ve noticed, is that the market makers are obviously not on Level II advertising their orders as much. 

What they’re doing now is they’re starting to route their orders through the exchanges, which is actually making it a lot easier to trade in a way that now you get to see big block orders out there. 

But, once again, with the new rules and regulations and market makers not on the floor of the exchanges as much, I’m starting to see a little bit more on the TotalView than on Level II.

The TotalView is the newer version of Nasdaq Level II?

Well, TotalView has been out for a long time. I actually had a conference call with Nasdaq, and they are going to be phasing out Level II, and where totally you’re going to be able to see almost 22 times more data that’s out there. 

So, you’ll get to see some more of the volume that’s out there when it comes to trading in the market. 

It used to be that market makers were the ones we thought were finding our stops and taking out the retail trader and whipsawing the price back. Was that always the case, or was that just kind of a myth about trading?

No, no, that was always the case, but now with the markets, everybody can trade in the market. They’re more obsolete. They’re not there as much as they used to be. They don’t control the market as much. 

Now it’s global. You and I are controlling the market. We’re doing more of the volume than they are because now you don’t have to go through the market makers anymore. 

They’re doing more high-velocity trading more than controlling the market as much, but you get to see those orders more, which helps a lot.

NEXT: Where to Find Solid Trading Opportunities


So, the transparency has helped, I guess, everyday traders really get a better view of the market?

Right. And you have to evolve with the market and see that, but the transparency obviously has changed a little bit in that respect. You just have to adapt a little bit more where you look now. 

Now you favor Nasdaq-listed stocks, and some people favor big board NYSE stocks. What’s the difference between those two markets?

There’s really not that much difference. I’m starting to trade more in New York now because New York is now trading similar to the Nasdaq market. 

Before, when you were dealing with New York, you were dealing with a lot of specialists on the floor.  Obviously, that’s not the case anymore. Now you can just go right to the book and just trade it right off the exchange directly. 

I like the Nasdaq stocks because they’re more volatile. Those are the ones I see, and obviously, you see me trade live in the market a lot where you can see a lot more percentage gainers or losers on there. 

New York favors more expensive ETFs, which I’m not a fan of. I like to have more control on the stock.

So, you have been trading for a long time, throughout the whole dot-com era and the crash. How many times have you had to reinvent your trading style?

Well, not that much. You just have to adapt. Listen, once you know how to trade, you can basically trade any market. You can trade futures; I could trade forex if I really wanted. All you have to do is teach it.

Nothing really has changed other than a couple of rules and regulations. The $25,000 a day trading rule; the fractions to decimals; the 1,000-share guarantee to 100-share guarantee. Other than that, I know there’s a new rule coming out soon. 

Sure, what is the rule?

Something about how orders get routed. It’s now going to be more a direct access, a little bit more. It has to still be traded by the broker, but it’s going to be coming out shortly.

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