877-218-1776 
Understanding the difference between a market maker and an ECN is critically important. Each plays an important role in the NASDAQ market. However, their roles and responsibilities are extremely different. Because there are no DMMs for the NASDAQ markets, bids and offers are displayed by broker dealers known as market makers. A market maker is a firm that is required to display a two-sided market. A two-sided market consists of a simultaneous bid and offer for the security quoted through the Nasdaq workstation.The market maker must be willing to buy the security at the bid price, which is displayed, as well as be willing to sell the security at the offering price, which also is displayed. These are known as firm quotes. There is no centralized location for the Nasdaq market; it is simply a network of computers that connects broker dealers throughout the world. Market makers purchase the security at the bid price and sell the security at the offering price. Their profit is the difference between the bid and the offer, which is known as the spread. Rule changes and new trading systems known as electronic communication networks, or ECNs, have narrowed the spreads on stocks significantly in recent years. Firms that act as market makers must continuously display two-sided quotes during normal business hours. Firms may remain open for extended hours trading but are not required to display quotes after the close of the market at 4:00 p.m. EST. During extended hours trading the market has greater volatility, lower liquidity, and fewer market participants than trading during the regular session. As a result, there are wider spreads and the risk of poor executions.
Electronic communication networks / ECNs are subscriber networks whose role is to match and pair off orders routed to them by broker dealers and institutions. When the ECN has an order imbalance it is allowed to display and execute third-party orders in the NASDAQ market center ECNs are widely used by both broker dealers and institutional investors to display and execute orders. ECN quotes are included in the Nasdaq quote system, but the ECN is not required to maintain a two-sided market like a market maker, and ECNs do not take positions in the security. ECNs may:
• Display 1 sided quotes.
• Enter and accept directed and nondirected orders.
• Accept automatic executions.
• Send orders for automatic execution through the NMCES
The key series 57 test points to remember are
1. Market makers must display a continuous 2 sided market. ECNs are allowed to display a bid or offer only based on customer interest.
2. Market makers may not pull their quotes. ECNS may enter and exit the market as needed.
3. Market makers take on risk and trade in a principal capacity. ECNs never take positions or risk in the security and only act as an agent.
This information will definitely be tested on your series 57 exam.