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Are stock exchanges like NASDAQ and NYSE market makers? In other words, are they providing liquidity by pairing individual buyers and sellers with each other in real-time? Or does it work differently?

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No, they are not market makers.

A market maker is someone who (i) quotes two prices (one 'low' and one 'high'), (ii) will buy from any seller at the low quoted price (even if there is no corresponding buyer right now), (iii) will sell to any buyer at the high quoted price (even if there is no corresponding seller) right now.

This injects liquidity into the market when there is an imbalance in the number of sellers and buyers.

NASDQ and NYSE are not market makers, they are marketplaces in which market makers operate.

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  • $\begingroup$ Correct. Stock exchanges are neutral platforms, they do not trade. $\endgroup$ – Hector Jun 4 '18 at 11:12
  • $\begingroup$ If this is the case, how are the prices of stocks the same across all stock brokers? $\endgroup$ – user31652 Jun 4 '18 at 16:32
  • $\begingroup$ @user31652 the price is set by competition in the market. The market makers and brokers alike must be quoting essentially the same prices, because noone would buy from someone quoting a higher price or sell to someone quoting lower price. The transaction and information frictions in routine securities services are so low that there is no way to get away with any price other than 'the market price'. $\endgroup$ – Ubiquitous Jun 4 '18 at 16:49
  • $\begingroup$ @user31652 if the prices were different, there would be an arbitrage opportunity : by selling at the highest price and buying at the lowest price simultaneously, you would be able to earn a profit, without taking any risk. Investors would exploit this anomaly until it would resorb itself. $\endgroup$ – Hector Jun 5 '18 at 13:25

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