What is a Specialist Market?

A specialist market is a market for a given security that is met by a specialist who fills orders from his or her own account, rather than through public orders. Market specialists are individuals who specialize in a particular security, providing a market for that security. This ensures that the market remains orderly and that liquidity is retained. Without market specialists, public orders might not be sufficient to meet the needs of the market, and disruptions should occur.

Market specialists are a form of market maker, meaning that they have committed to maintaining a market for a specific security. Market makers work with each other and with other traders on a market to facilitate trades of the securities they supervise. Their work includes maintaining shares of a security in their accounts to provide shares for trading, in addition to stepping forward to fill sell orders for a security to keep the security moving in the market. When a specialist market arises, these financial professions work to address it and clear any outstanding orders.

In a specialist market, public orders are not covering the need. This may be because too many members of a public want shares and a market specialist needs to step in and make shares available by releasing them from his or her account. The opposite can also occur, with people looking to sell shares and being unable to find buyers on the open market. The market specialist can reach a sales agreement and purchase the shares, holding them on account until a need for available shares to buy arises.

Specialists work with limit orders, orders that have set amounts and prices. Setting a limit is designed to reduce exposure to risks on the market by preventing situations where shares are sold too low or purchased too high, but it can create a specialist market by limiting the number of public trades available. The market specialist can be involved in the process of setting and determining prices with his or her trading activity, and identifies limit orders that are not likely to be filled with public orders in a specialist market in order to spot trading opportunities.

There are advantages to working as a market specialist. Keeping the market for a given security stable can stabilize the market as a whole, providing greater opportunities for trading in other areas of the market. Specialists also have the advantage of being heavily involved in trading and having numerous opportunities to make profits on purchases and sales. Brokers may turn to a specialist first when it comes to filling a limit order and these financial professionals also have professional connections that enable them to take advantage of changes in the market very quickly.