Exchange Market Size

Normal market size is the minimum number of securities for which a market maker is obliged to quote firm bid and ask prices. Of course, in a quote driven market, market makers cannot be expected to offer quotes that are firm up to an unlimited size. However, they must provide sufficient liquidity for investors to be able to transact reasonable quantities of a security at the quoted price. This is what constitutes normal market size.

On the London Stock Exchange, normal market size (NMS) for each security is calculated quarterly and is based on 2.5 per cent of the security's average daily turnover in the preceding year. Market makers are often prepared to quote firm prices for volumes larger than the NMS but must quote prices for volumes of at least NMS.

Example

If a company “Midco” has an NMS of 1,000, a market maker must be prepared to quote firm prices for volumes of at least that size. The market maker may go higher though, for example he may quote a size of 3,000 offer and 3,000 bid.

In this scenario your broker, on your behalf, should be able to buy or sell up to 3,000 shares in Midco via that market maker at the prices quoted by that market maker.

The market maker's quote will show on your broker's screen as 'Midco at 105 - 110 (3,000 x 3,000). This means the market maker is prepared to sell up to 3,000 shares at 110p or buy up to 3,000 shares at 105p.

If you wanted to buy or sell more than 3,000 shares, this may be possible, but you may have to pay rather more than 110p to get the shares, or accept rather less than 105p to sell the shares. Alternatively, breaking your transaction up into smaller trades may allow you to transact in higher volumes at the desired price.

Some key points to bear in mind:

• Large companies tend to have high NMS figures. This is because of their high level of liquidity. For example, a large company may often see millions of its shares traded in one day, giving an NMS of tens of thousands of shares. In these instances, you can be fairly sure that if you are just buying 3,000 shares, the prices quoted are good. Your order isn't going to move the market. -
• Small companies have lower NMS figures. This is because their shares tend to be less liquid. However, you will see from the above that this doesn't necessarily mean that you'll be unable to purchase a number of shares larger than the NMS. Provided your requested trade is within the market makers quoted size, then you should be able to deal.