Unlike the NYSE, the Nasdaq Stock Exchange uses a computerized system to match buyers and sellers of stock. After the implementation of the Nasdaq Stock Market, many enhanced features aided traders to interact in this virtual trading marketplace. Spreads narrowed and market participants were more visible to execute orders against. This was in response to the 1987 Stock market sell off that left many investors and traders unable to facilitate trades in a timely manner. In contrast to the NYSE specialist system, the Nasdaq Stock Market employed Market Makers to provide liquidity to issues.
Market Makers are independent dealers that participate for retail and institutional order flow.
There are over 500 of these firms providing the desired liquidity in the Nasdaq. There are a few basic rules that Market Makers must adhere to. First, they must make a reasonable two-sided market. They visually show their bid and ask quotations. They must honor these quoted prices up to their liability requirements shown.