is acompanyor an individual that quotes both a buy and a sell price in afinancial instrumentorcommodityheld in inventory, hoping to make a profit on theTheU.S. Securities and Exchange Commissiondefines a market maker as a firm that stands ready to buy and sellstockon a regular and continuous basis at a publicly quoted price.
A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that he or she will take the position in a particular assigned security, option or option index.4
Most foreign exchange trading firms are market makers and so are many banks. The market maker both sells to and also buys from its clients and is compensated by means of price differentials for the service of providingliquidity, reducing transaction costs and facilitating trade.
Market makers that stand ready to buy and sellstockslisted on an exchange, such as theNew York Stock Exchangeor theLondon Stock Exchange, are called third market makers.3Moststock exchangesoperate on a matched bargain or order driven basis. When a buyers bid price meets a sellers offer price or vice versa, the stock exchanges matching system decides that a deal has been executed. In such a system, there may be no designated or official market makers, but market makers nevertheless exist.
In the United States, theNew York Stock Exchange(NYSE) andAmerican Stock Exchange(AMEX), among others, have Designated Market Makers, formerly known as specialists, who act as the official market maker for a given security. The market makers provide a required amount ofliquidityto the securitys market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders. In return, the specialist is granted various informational andtrade executionadvantages.
Other U.S. exchanges, most prominently theNASDAQStock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability tonaked shorta stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting. Recent changes to the rules have explicitly banned naked shorting by options market makers.56
As of October2008updatethere were over two thousand market makers in the USA7and over a hundred in Canada.8
In liquid markets like theNew York Stock Exchange, nearly every asset has open interest, providing two benefits: price takers can buy or sell at any time, and observers can continually monitor a precise price of every asset.9
A prediction market, or market explicitly designed to uncover the value of an asset, relies heavily on continualprice discoveryholding true.9Prediction markets benefit from automated market makers, or algorithmic traders that maintain constant open interest, providing needed liquidity to the markets that would be difficult to provide naturally.9
Examples of New York market makers areOptiverJane Street Capital, andVirtu Financial.
On theLondon Stock Exchange(LSE) there are official market makers for many securities. Some of the LSEs member firms take on the obligation of always making a two-way price in each of the stocks in which they make markets. Their prices are the ones displayed on theStock Exchange Automated Quotation(SEAQ) system and it is they who generally deal withbrokersbuying or selling stock on behalf of clients.
Proponents of the official market making system claim market makers add to theliquidityand depth of the market by taking ashortorlongposition for a time, thus assuming some risk in return for the chance of a small profit. On the LSE, one can always buy and sell stock: each stock always has at least two market makers and they are obliged to deal.
In contrast, on smaller, order-driven markets such as theJSE Securities Exchangeit can be difficult to determine the buying and selling prices of even a small block of stocks that lack a clear and immediate market value because there are often no buyers or sellers on the order board.
Unofficial market makers are free to operate on order driven markets or, indeed, on the LSE. They do not have the obligation to always be making a two-way price, but they do not have the advantage that everyone must deal with them either.
Examples of UK Market makers sinceBig Bang Dayare Peel Hunt LLP,Winterflood Securities,10Liberum Capital, Shore Capital, Fairfax IS and Altium Securities.
Prior to the Big Bang,jobbershad exclusive rights of market making on the LSE.
TheFrankfurt Stock Exchange(FWB) runs a system of market makers appointed by the listed companies. These are called designated sponsors.11Designated Sponsors secure higher liquidity by quoting binding prices for buying and selling the shares. The largest market maker by number of mandates in Germany isClose Brothers Seydler.12
The difference between the price at which a market maker is willing to buy astock(the bid price) and the price that the firm is willing to sell it (the ask price) is known as the market maker spread, orbid-ask spread.13Supposing that equal amounts of buy and sell orders arrive and the price never changes, this is the amount that the market maker will gain on each round trip. Market makers also provideliquidityto their own firms clients, for which they earn a commission.1314
Divide and choose, analogous to a two-way price
. Addison-Wesley Educational Publishers, Inc. p.134.ISBN0-673-99988-2.
Staff, Investopedia (23 November 2003).Market Maker.
Designated Primary Market Maker (DPM) Program Info.
Barker, Alex (October 19, 2011).EU ban on naked CDS to become permanent.
List of U.S. market makers. Archived fromthe originalon 2009-01-22
List of market makers in Canada. Archived fromthe originalon 2007-01-09
Othman, Abraham; Sandholm, Tuomas; Pennock, David; Reeves, Daniel.A Practical Liquidity-Sensitive Automated Market Maker
Archived copy. Archived fromthe originalon 2013-06-09
Archived copy. Archived fromthe originalon 2010-07-06
Electronic Trading: The Role of a Market Maker.
High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
Understanding Derivatives: Markets and Infrastructure – Chapter 1 Derivatives OverviewFederal Reserve Bank of Chicago, Financial Markets Group
Articles containing potentially dated statements from October 2008
All articles containing potentially dated statements
This page was last edited on 10 April 2019, at 20:03