What is a Markdown?
Markdown refers to the negative spread between the price a broker charges a client for a security and the highest price at which that security is sold between brokers. It is the opposite of markup.
If a broker wishes to increase his sales volume in a security or set of securities, he may choose to sell them at markdown prices. In other words, if a broker sells a security to a client at a lower price than the highest bid (selling) price in the securities market among brokers, the price is a markdown price.
To illustrate, suppose a broker sells shares of XYZ stock to his clients at $20 per share. He originally purchased the shares in the broker market at $40 per share. Therefore, the markdown on the shares he sells is -$20 ($20-$40).
Markdown should not be confused with markup, which is the positive spread between the lowest bid price in the brokers market and the higher price a broker charges to clients.
Why Markdowns Matter
The motivation for a broker to sell securities at markdown prices is to kindle trading activity among clients in the hopes that the multiple commissions on a higher sales volume will offset money lost in the negative spread.