Normal Market Size and the Spread

Normal market size (NMS) is the minimum number of shares, as specified by the London Stock Exchange, for which a market maker is obliged to quote firm bid and offer prices.

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. However, market makers are usually prepared to quote firm prices for volumes larger than the NMS.


Tesco may have an NMS of 1,000, yet a market maker might be prepared to quote firm prices for volumes of, say, 3,000 offer and 3,000 bid. Your broker, on your behalf, should therefore be able to buy or sell up to 3,000 shares in Tesco via that market maker at the prices quoted by that market maker, despite Tesco’s NMS of 1,000.

The market maker’s quote will show on your broker’s screen as ‘Tesco at 370 – 371 (3,000 x 3,000), ie the market maker is prepared to sell to your broker up to 3,000 shares at 370p or buy from your broker 3,000 shares at 371p.

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 371p to get the shares, or accept rather less than 370p to sell the shares.

Large companies tend to have high NMS figures.

This is because of their high level of liquidity. You can be fairly sure that if you are 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.

The spread
The spread is closely related to normal market size, and both of them are symptoms of a stock’s liquidity.

Just as brokers give a stock with low liquidity a low NMS, so they also give it a wide spread.

The wide spread gives the market makers flexibility when they go out into the market to secure the shares that you want to buy.

Suppose shares in a small compamy have a mid-market price of 50p. If the market makers quote a narrow bid/offer spread (48p and 52p), and you place an order for 4,000 shares at 52p, they face the nasty possibility of being unable to buy the shares for less than 52p. Why? Because it’s such a small company with not many shares in issue, and daily trading volumes are small.

In contrast, a large company whose shares are traded in volumes of 5m per day, will have a fairly narrow spread, because the market maker will have no trouble fulfilling an order at a predictable price.

In fact, the largest companies are traded by brokers using the SETS ‘order book’ system, which makes the prices even more predictable. The order book cuts out market makers altogether, handling all trading by computer. Most FTSE 100 companies are traded this way. The important thing from your point of view is that:

Order book stocks usually have narrower spreads than stocks traded via market makers, because their shares are much more liquid.

The prices of order book stocks can be volatile early or late in the day, so it may be worth trading cautiously.