Market Maker
Tue, Apr 15A market maker is a financial intermediary that is prepared to buy or sell assets by consistently providing bid and ask prices that are available to other traders or registered participants on a trading platform.
A market maker can be an individual or an institution that trades large quantities of a specific asset to enhance liquidity and ensure the efficient operation of financial markets.
While an individual can serve as a market maker, it is more typical for a large institution to take on this role due to the volume of each asset required to support the necessary trading activity.
In practice, a market maker, also referred to as a liquidity provider, is a company or individual that quotes the bid and ask prices of any commodity or financial product to profit from the bid/ask spread.
Market makers hold a certain amount of the assets they trade. By displaying buy and sell quotes and executing trades quickly at those prices, they create a simple method for placing trades.
They are most prevalent in stock trading but can also operate in other markets.
In the stock market, a market maker can only sell the number of shares they can acquire themselves. However, they are required to meet the Normal Market Size (NMS), which is the minimum number of securities that varies from one share to another.
The term market maker originates from the practice of establishing market prices at levels necessary for supply and demand to achieve equilibrium.
During periods of market volatility, market makers must remain stable and continue to uphold market performance, which exposes them to significant risk.
This is why market makers generate revenue by maintaining a spread on the assets they facilitate for trading, compensating for the risk of purchasing an asset that may lose value.
To offset the risk of acquiring an asset that could depreciate, market makers maintain a spread on the assets they allow you to trade.
For instance, a market maker might offer to buy 100 shares from you at $10 each (the ask price) and then sell them to a buyer at $10.02 (the bid price). Although this represents only a $0.02 difference, in high-volume trading, the profits can accumulate quickly.
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