What are Market Makers?
Market makers are generally the financial institution and investment banks which perform activities to ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there in the market so that trading can be done without any problem.
A market maker is a “market participant” that executes a transaction of buy and sells securities regularly at prices that are prevailing in an exchange’s trading system for its account, which is called principal trades and for customer accounts, which are called agency trades. With the help of these systems, a broker can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those orders. These are member firms appointed by the stock exchange to maintain the liquidity and trade volume into stock markets.
They are commonly known as a brokerage firm that provides purchase and sale options for investors to keep the financial markets volatile. A broker firm can also be an individual intermediary/Broker.
As we note from above, Mackie Research Capital Corporate will act as a market maker broker to Nubeva Technologies.
How does this Method work?
By holding a large number of a given shares/securities, a market maker is able to adjust a high volume of market orders in seconds at competitive prices. If investors are selling, they are required to keep buying, and vice versa. Their role is to take the opposite side of whatever trades/transactions are being conducted at any given point in time.
Thus with this strategy, they are able to fulfill the market demand for a stock and facilitate its circulation.
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Role of Market Makers
#1 – Providing Liquidity
The role of a broker is to provide liquidity and make trading accessible to retail traders. There are required to provide the opportunity to make a trade in the market. A broker firm facilitates the smooth flow of financial markets. Makers Market helps investors and traders to buy and sell security easily in the market.
#2 – Matching Orders
The broker identifies the market for buyers and sellers of the same stock/securities at a particular volume and then executes a buy order on a stock/security of the same volume to a sell order on the same stock/security with the same volume. But, there are situations when it may happen that there is no exact match for the order. It is where market makers play a vital role by acting as a buyer or seller for such a transaction. In this manner, they act as a counter-party to the trade to buy a sell order from a trader or sell an asset to a trader to match the buy order.
#3 – Stabilizing Spreads
Broker firm has the influence to stabilize spreads by maintaining the liquidity; it would be difficult to keep the spreads low & at a fixed rate. However, as the broker bears this risk and then fix prices for the traders, which help them to keep the spreads low and fixed. It helps in cost savings for retail traders while executing trades.
- It analysis the security options, which benefits the company.
- It helps to have a continuous source of the liquidity for the company’s scrips.
- They help to provide easy in valuation for the company’s scrips.
- They help investors to liquidate their investments at a better price at any point in time.
- This concept has a tuff competition, which results in the efficient pricing of a stock.
- They benefit the investors by providing valuable information on the company.
Types of Market Makers
There are basically two types of brokers in the market:
#1 – Principal Market Makers (PMM)
It offers to buy and sell quotes for almost 18 months from the commencement of the initial trading.
#2 – Additional Market Makers (AMM)
It normally buys and sells quotes for almost one year from the actual commencement of the initial trading.
In this example, let’s say that a market maker broker has entered a sell order for Titan Shares, and the bid/ask is Rs.65.25/Rs.65.30. The maker can try to sell shares of Titan at Rs.65.30. If this is what the maker chooses to do, he or she can then turn around and enter a bid order to buy shares in Titan Shares. The market maker broker can bid higher or lower than the current bid of Rs.65.25. If he or she enters a bid at Rs.65.26, then a new market is created (referred to as making a market) because that bid price is now the best bid. If the broker firm attracts a seller at the new bid price of Rs.65.26, then he or she has successfully “made the spread.” The market maker sold 1,000 shares at Rs.65.30 and bought these shares back at Rs.65.26. As a result, the maker made Rs.40 (1,000 shares x Rs.0.04) on the difference between the two transactions.
Market Maker Video
This article has been a guide to what is Market Makers and its definition. Here we discuss how the market maker method works along with its types and practical examples. You can also have a look at these articles on Investment Banking –