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are compensated through time priority in 
that they are allowed to participate in any 
incoming marketable order up to 40% of 
the minimum guaranteed fill.  

Europe

Turning to Europe, the London Stock 
Exchange has stocks that are primarily 
order driven and others that are quote 
driven. It requires market makers in order 
driven markets to maintain quotes that 
can be electronically executed 90% of the 
day. In quote driven markets, the market 
maker is required to post a firm quote but 
there is no stated minimum percentage of 
the day and the quotes are not required 
to be electronically executable. The 
LSE has maximum spread widths of 5% 
or 10% depending on the stock. LSE 
market makers are also required to quote 
minimum depths based on the stock’s 
average daily turnover. 

Borsa Italiana refers to market makers 
in its STAR segment as specialists. They 
are required to continuously quote for 
an exchange-specified number of shares. 
Maximum spread widths are set at 
between 1% and 4.5% depending on the 
average daily currency turnover in the 
stock. Interestingly, STAR specialists 

are required to provide at least two 
research reports each year for each 
company they trade. 

On the European markets operated by 
NYSE/Euronext, there are two types of 
market makers – auction or permanent. 
The former add liquidity for stocks only 
traded through call auctions and the latter 
for stocks traded continuously. In the 
case of auction market makers they are 
required to maintain a spread during the 
order collection phase of each call auction. 
the maximum spread width for both types 
of market makers are between 2% and 5% 
(€0.10 and €0.25) for stocks trading above 
(at or less than) €5. Euronext LPs obtain 
a reduction in fees and may receive side 
payments from the companies they trade.  

Deutsche Börse has two different models 
for market makers. In their continuous 
trading segment they require less liquid 
companies to have at least one market 
maker called a Designated Sponsor 
(DS.) The maximum spreads DSs can 
post ranges from 1.5% to 10% for an 
exchange-specified number of shares. DSs 
are required to post bids and offers at least 
50% of the trading day and participate in 
at least 80% of all call auctions for their 
stocks. Designated Sponsors on Deutsche 
Börse receive an exchange set annual 
fee of €34,000 from each listed firm. 
In addition if DSs participate in at least 

A market maker 

makes a profit by 
attempting to sell 

high and buy low. 

Market makers 

establish quotes 

whereby the bid price 

is set slightly lower 

than listed prices 

and the ask price is 

set slightly higher in 
order to earn a small 

margin. 

COVER STORY