Role and Capabilities of a Market Maker

During the specified period of the trading session (American, Asian-Pacific, European), the market makers must continuously maintain two-way futures quotes, observing the minimum volume of own orders agreed with the exchange and the spread between bid-ask quotes (widening of spread for periods of increased volatility is possible). As counterparties to each transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.

IMPORTANT.

Why do market makers act as counterparties for most orders, but not for all? The rest of the transactions may temporarily be accumulated by other market participants, both with speculators and hedgers; however, over time, all open positions will pass on to market makers, when one of the parties of a transaction, in which the market maker does not participate, decides to close the position.

 

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7 thoughts on “Role and Capabilities of a Market Maker

  1. Is there a limit placed on the number of market makers in a particular security or segment of the market. If such a limit exists, how is it determined?

  2. The market maker in general adds to the stability, liquidity and transparency (i.e. price discovery mechanism) of financial markets and is therefor a desirable participant in emerging markets.

  3. In summary, market makers do two things:
     First, they are required to make a market in a stock by buying and selling from their own inventory, when public orders to buy or sell the stock are absent.
     Second, they may keep the market book of orders, consisting of limit orders to buy and sell, as well as stop orders placed by the general market participants

  4. Fundamentals are ubiquitous and dynamic. There is no way to isolate each and every pertinent fact in order to construct a clear fundamental snapshot of a market at a specific moment in time.

  5. Market liquidity is likely to be asymmetrical in that it is high in a bull market, but may be very thin in a bear market, or the majority of market participants may all favour buying or selling at the same time.

  6. The market maker looks to get paid by receiving a premium from the market taker in return for providing constant liquidity.

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