A Background to the Market and Market Makers
A Market Maker runs a 'shop' and you buy shares from him or sell them back to him.
The Market Makers act as retailers of shares and display their prices during working hours. The prices may vary (sometimes considerably) during the day, depending on a number of influences. For example, if holders of very large amounts of a share decide to sell (or a combination of a lot of holders of small amounts), then the Market Makers will reduce the price that they are prepared to pay for the share. The converse is true also; if there is a consistent and large enough demand for a share, then the Market Makers will increase the price. Market Makers make money from buying shares at a lower price to which they sell them. This is the bid/offer spread. The more actively a share is traded the more money a Market Maker makes.
It is often felt that the Market Makers manipulate the prices. "Market Manipulation" is an emotive term, and conjurers images of shady deals and exploitation. Market Makers are not elusive companies that appear then vanish overnight. Market Makers are duty bound to make a market and to meet the needs of those they are responsible, to this end they may try to influence the market.
Market Makers are however known to lower prices to "panic" investors into selling, sometimes called "shaking the tree"? Moving the price up, encourages sells, moving it down also encourage sell, hence also the term dead cat bounce when a Market Maker will mark a falling stock up to encourage buyers in thinking they have reached the bottom.
A good pricing system such as Level 2 will give you an indication which Market Makers are keenly priced. Your broker using the same systems as you now have can sometimes get a better price than those on the screen. This is because Market Makers compete with one another for business. When your broker calls the Market Maker he is giving them the opportunity to 'bid' for the business, the Market Maker may well improve on the price on offer via the screens. The Market Maker only makes money when they are buying and selling, so the Market Maker will prefer to see the business go through their books at a reduce margin than allow it to go to another Market Maker.
When you buy and sell shares in most circumstances (SEAQ/AIM) your broker has to go through a Market Maker. The Market Maker works for an institution that makes a market (will buy and sell) that particular stock. They provide the market with liquidity - i.e. there will always be a price you can sell your stock at, there will always be a price you can buy some stock at (unless the share is suspended).