Specialist firms, also known as market makers or designated market makers, play a crucial role on a stock exchange by facilitating the smooth functioning of the market and contributing to liquidity. These firms specialize in particular securities or market segments, and their primary responsibility is to maintain an orderly and liquid market for the assigned securities.

The key role of specialist firms involves acting as intermediaries between buyers and sellers. They continuously quote both bid and ask prices for the securities they cover, providing a two-sided market. This constant presence enhances market liquidity, allowing investors to execute trades more efficiently.

Specialists also play a vital role in price discovery. By closely monitoring supply and demand dynamics, they adjust their quotes to reflect the latest market conditions. This contributes to the overall stability and accuracy of prices in the market.

In times of market stress or volatility, specialist firms can use their expertise to manage order imbalances and prevent disorderly trading. They may step in to buy or sell shares from their own inventory to maintain market stability.

While the role of specialists has evolved with technological advancements and the rise of electronic trading, their function remains crucial in ensuring fair, efficient, and orderly markets on stock exchanges.