Rules that give the middlemen a cutting edge

MARKET-MAKERS are middlemen, buying shares from one stockbroker and selling them to another at - they hope - a higher price. They are obliged to quote two prices on the Stock Exchange Automated Quotation Service (Seaq) information screen when the market is open; one at which they will buy and one at which they will sell.

Investors who want to buy or sell shares, whether they be institutional investors such as pension funds, or private clients, generally use a stockbroker. The stockbroker will execute that order in-house if he or she has one client who wants to buy a share and another who wants to sell a similar amount of the share. But more often, he or she will look at the Seaq screen and see what prices the market-makers are quoting for that share.

Each share has its own page, and market-makers' prices are displayed there along with the maximum number of shares they are willing to buy or sell at that price. At the top of the page is a yellow strip known as the 'touch'. This displays the best quoted offer price - for purchase of shares - and the best bid price for sales.

The broker will then call a market-maker and agree a deal. If he wants to buy or sell a greater number of shares than the quantity on the screen, the prices there will only serve as a starting point for negotiations.

Market-makers' enjoy the following privileges:

Only market-makers can quote prices on the Stock Exchange Automated Quotations Service, the London Stock Exchange's screen-based market stall where shares and their prices are displayed.

Only market-makers have access to Inter-Dealer Brokers. IDBs deal between market-makers, allowing them to buy or sell stock anonymously.

Only market-makers can borrow stock through approved stock lenders. That allows them to cover shortages without driving up prices.

Market-makers are exempt from stamp duty.

They can delay public announcements of large trades. Normally, market-makers have to report trades to the London Stock Exchange within three minutes. The Exchange then relays this information to other market participants.

But a trade that is deemed to be more than three times the Normal Market Size (NMS) - a quantity that varies from one stock to another - need not be reported for 90 minutes. A trade that is more than 75 times NMS need not be reported for up to five working days.

This privilege gives market-makers time to unwind large holdings of shares before other market-makers find out about them.

Otherwise, prices might be driven down after a market-maker had been seen to have taken on a large position and the market-maker would be exposed to large losses.