Market Maker | Definition, Example, Strategy & Role of a Broker

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What is a Market Makers?

Market Maker Definition – 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 own account which are called principal trades and for customer accounts which are called agency trades. With the help of these systems, a market maker broker can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those orders. Makers Market are member firms appointed by the stock exchange to maintain the liquidity and trade volume into stock markets.

A Market Maker is commonly known as broker firm that provides purchase and sale options for investors in order to keep the financial markets volatile. A market maker can also be an individual intermediary/Broker.

source: prnewswire.com

As we note from above, Mackie Research Capital Corporate will act as a market maker broker to Nubeva Technologies.

Thus, market making facilitates the smooth flow of financial markets. This facilitates investors and traders to buy and sell securities easily. Low Volatility in a market naturally results in less investments overall. Less investment would result in less funds available to companies which result in the decrease in prices of shares of smaller companies. The system of market makers reduces the time required to execute a trade and the cost of transacting in that stock, allowing a large number of shares to be traded.

As per exchange rules, there are many categories of the market maker. A market maker firm has an option to decide to commit to more responsibilities for the smooth functioning of the transaction in the market performance of the specific security in which it agrees to trade. a Market maker is responsible for continuously quoting prices at which they are willing to buy and sell for stocks.

Makers Market are repaid for the risk of holding the stock. The risk they face is a decrease in the value of a security after it has been purchased from a seller and before it’s sold to a buyer. Therefore, a market maker broker charges a margin on each stock that they cover. This is known as the bid-ask margin.

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Market Maker Strategy – How it Works?

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, Makers Market 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 Market maker strategy they are able to fulfill the market demand for a stock and facilitate its circulation.

Role of Market Makers

Market makers are very important in retail trade. Some of the roles of market makers are listed here:

#1 – Providing Liquidity

The role of a market maker broker is to provide liquidity and make the trading accessible to retail traders. There are required to provide the opportunity to make a trade in the market. Market making 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 market maker broker identifies the market for buyers and sellers of a 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. This is where market makers play a vital role by acting as a buyer or seller for such a transaction. In this manner, a market maker acts as 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

Market makers have 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 market maker broker bear this risk and then fix prices for the traders, which help them to keep the spreads low and fixed. This helps in cost savings for retail traders while executing trades.

Advantages of Market Making

To Companies:

Market Makers analysis the security options, which benefits the company.
It helps to continuous source the liquidity for the company’s scrips.
They help to provide easy in valuation for the company’s scrips.

To Investors:

They help investors to liquidate their investments at a better price at any point of time.
Market making concept has a tuff competition which results in the efficient pricing of a stock.
They benefit the investors by providing the valuable information on the company.

Types of Market Makers

There are basically two types of Market maker brokers in the market:

#1 – Principal Market Makers (PMM)

Principle Market Makers offer to buy and sell quotes for a period of almost 18 months from the commencement of the initial trading.

#2 – Additional Market Makers (AMM)

Additional Makers Market normally buy and sell quotes for a period of almost one year from the actual commencement of the initial trading.

Market Maker Example

In this market maker 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 market maker can try to sell shares of Titan at Rs.65.30. If this is what the market 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 market maker 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 market maker made Rs.40 (1,000 shares x Rs.0.04) on the difference between the two transactions.

Market Maker | Definition, Example, Strategy & Role of a Broker