: Do online brokers use market makers? If I use an online broker such as Trade King or Scottrade to buy shares of some company, how do they buy the shares? Do they have to go through a market maker? Is there a notion of the

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Scottrade itself is a market maker. But Trade King isn't.

Market makers is a risky endeavour. As the market maker needs to hold securities(inventory) so that it can fulfill orders, both buy and sell, it should be willing to take some losses if required. Smaller organizations would be loath to take such losses, which may be detrimental for their existence. So they use the services of other market makers. Market makers take their cut from the bid ask spread which compensates them for the risk they take.

There are higher monetary rules and regulations imposed upon a market maker along , which is cost inhibiting for a small broker.

Purchasing directly is a myth for small timers unless and until you are a top shot like Warren Buffet. Nobody is willing to buy or sell you(r)10-20 shares. It is costly, time consuming and most probably a nuisance. The settlements and background stuff is quite cumbersome. So they do it in larger blocks to minimize costs and increase efficiency. Assume 10000 trades of 15 shares each or a single trade of 150000 shares. The regulatory filing will be simple( only one rather than 10000) for the settlement and not that costly either. No broker or exchange would like its order network to be clogged by 10000 order of so small values. So it makes it easier and cheaper for everybody including the exchanges, market makers, buyers, sellers and everybody involved.