Normal market size

The London Stock Exchange sets a normal market size for each listed security. It is set at 2.5% of the average daily turnover (i.e. total amount traded) in the security in the previous year.

The main importance of the normal market size is for market maker quotes on quote driven trading systems, primarily the SEAQ system. A market maker for a SEAQ security is obliged to continually quote bid and offer prices that are firm for deals up to the normal market size.

It is obviously impossible for market makers to offer quotes that would be firm up to an unlimited size. For a quote driven system to provide the liquidity it should, investors should be able to rely on market makers to take reasonably ordinary (i.e. not unusually large) quantities of a security at the quoted price.

The normal market size is a simple transparent mechanism that reconciles these requirements.

When trading more than the normal market size in a security through a quote driven trading system, the mechanism changes. For most trades, the broker will contract a market maker (or market makers) in order to ask for a quote that is good for the larger quantity. If the quantity is only a little more than the normal market size, the price may not change, but market makers are likely to offer worse prices as the deal size gets bigger.

As the size of the number of securities being bought or sold gets larger it becomes harder to get a good price. Very large blocks may be sold over a period of time rather than in one go, or by finding buyers or sellers outside the trading system.