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Market making is that the quoting of both a buy- and a sell-price during a financial instrument held in inventory, within the hope of creating a profit on the bid-ask spread. In Market making, transactions are events, positions in space and time. Every trade requires a buyer and a seller, ergo a buyer and seller of an equivalent instrument occupying an equivalent position in space and time. Many instruments exist and there are many spaces and times. the probabilities of someone willing to shop for a sheep and somebody else selling it on Regent Street at midday (prime sheeping time) are low. Markets (economics) attempt to solve this problem by providing an area , sometimes physical though more often abstract, where parties can transact. Thus, markets put parties curious about exchanging similar things in similar places to extend the probability of a transaction. This still leaves the matter of your time – the customer wants to shop for that sheep at midday but the vendor can’t get into Regent Street until 2 Ppm. An enlightened individual seeing that buyer sheepless every morning and noticing the abundance of sheep within the afternoon would note that he could be ready to sell the customer a sheep for a touch quite the gentleman later within the day would charge him. Of course, this is able to involve carrying a listing of sheep. But supposing there are enough buyers and sellers and therefore the prices of sheep aren’t changing an excessive amount of it’s reasonable to assume the danger of the inventory dying in exchange for the spread. Market making is that the process by which broker-dealers offer liquidity during a particular market. Broker dealers take the danger and pledge to carry a specific number of shares during a security. The market makers show their quotes and compete among themselves for the customers’ orders. Market makers are required to “make a market” which suggests buy and sell the actual security during which they’re market makers. However, they’re not required to shop for and sell at particular prices. In order to be ready to perform their duties, market makers got to hold inventory of the actual security. Market Making and Flow Trading requires competition for the flow of orders from their clients by displaying buy and sell quotations for a guaranteed number of shares. The difference between the worth at which a market maker is willing to shop for , and therefore the price at which the firm is willing to sell it’s called the Spread. This spread represents the potential profit a Market Maker can receive on each trade (both the buy and sell side added together). Once an order is received, the market maker immediately sells from their own inventory or offsets the order with another firm. Market Makers play a crucial role within the financial markets, acting as catalysts for daily trading and enhancing the liquidity of equities across the market. However, making money from the differences in bid and ask prices isn’t the sole function of market makers. Within their firm, the most priority is to supply liquidity to the firms’ clients, receiving a commission for every trade.

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