What is the difference between a market maker and a specialist in equity trading?

Market makers and specialists both provide liquidity, but they operate in different market structures and have distinct obligations.

Market Maker

• Operates in dealer (OTC) markets such as NASDAQ
• Any firm meeting capital requirements can register as a market maker for a given stock
• Multiple market makers compete for the same security, which narrows the bid-ask spread
• Profit comes from the spread between their bid (buy) and ask (sell) prices
• No obligation to maintain a fair and orderly market in the traditional sense, though regulatory rules require continuous two-sided quotes during market hours

Specialist (Designated Market Maker / DMM)

• Operates on auction exchanges like the NYSE
• Each listed stock is assigned one specialist firm responsible for that security
• The specialist maintains the limit order book and must step in as a buyer or seller of last resort when order imbalances arise
• Profit comes from both the spread and from seeing the limit order book (informational advantage)
• Has an affirmative obligation to maintain a fair and orderly market, meaning they must trade against the prevailing trend when necessary

Example: Imagine Thornfield Industries (fictional) is listed on the NYSE. Its DMM is obligated to buy shares if a sudden wave of sell orders hits and no natural buyers exist — absorbing temporary imbalances. On NASDAQ, if Thornfield were traded OTC, three competing market makers would each post their own bid-ask quotes, and the best prices would form the National Best Bid and Offer (NBBO).

Exam tip: The CFA exam may test whether you understand the specialist's affirmative obligation versus the market maker's competitive quoting. Remember that specialists can see unexecuted limit orders — an advantage that also comes with responsibility.

Practice more equity market structure questions in our CFA Level I question bank.