When a company first starts selling stock, figuring out how to get the share price right can be tricky: Set the price too low and demand overheats and supply gets drained; set the price too high and demand falls off.
That’s where the designated market maker comes in.He or she gets busy before the bell, fielding calls from buyers and sellers about what the opening share price should be.
James Angel is a finance professor at Georgetown University, he watched designated market makers in action during the LinkedIn IPO.
"They would be calling out the various prices at which they thought it was going to open," he recalls. "Eventually, they figured out where the price was going to open and then they had the opening trade and then the computers took over."
Computers do largely dominate stock trades, but the role of human judgment is still crucial.
"The human element is there to backstop anything that may happen," says says Matthew Cheslock, a designated market maker for Virtu Financial.
"We trade in milliseconds now and it’s hard to believe that the human can react that fast, but we can do it because of our experiences down here. Most of the people who do it have been down here for many years."
Cheslock’s been on the floor for 20 years. Once the human has handed trading off to the machines, the designated market maker’s role isn’t over. Gary Shilling, an investment economist, compares the market maker to a traffic cop, who keeps trades running smoothly.
"If nobody else wants to buy, they’re supposed to be buying, if nobody else wants to sell, they’re supposed to be selling," says Shilling. "But they also were supposed to be, as they say, the last troops in times of real duress."
Things like buying during a big sell-off to help stabilize the price, or selling during a surge in demand, to make sure shares are available.