Who is a market maker at the stock exchange? Market maker is a legal or physical person, who signed an agreement with the exchange on the support of prices of traded assets. And the terms of the agreement will determine the direction of the activity: one MM is responsible for the preferred stocks, the other one - for keeping the liquidity and necessary spread at a certain period of the trading session. In simple words, they are the same traders, but with certain responsibilities.
How do you define a market maker? They include central and commercial banks, large funds, brokers and private investors. They are divided into two types according to the level of their influence on the market.
Institutional. Organizations that maintain the balance between supply and demand, prices and trading volumes within the framework of an agreement with the exchange.
Speculative. Participants who can independently influence price fluctuations with large volumes of traded assets.
Main functions of market makers
No matter how sharks market makers may be in the eyes of newbies, the main purpose of their activity is to keep liquidity of exchange instruments and to provide traders with modest deposits with trading opportunities. Exactly they allow to make transactions at adequate price in reasonable time intervals. Thus, it is possible to allocate the following main responsibilities of MM:
keeping quotes within a certain range;
provision of additional liquidity as needed;
prevention of price gaps.
To achieve their goals, market makers fulfill contractual obligations: they buy and sell shares, futures or currency, predict price fluctuations, regulate the volume of lots to maintain liquidity. Market makers can be divided into two types by the type of function they perform.
Order-takers. They trade on the client's order as an intermediary.
Order Makers. They make forecasts for specific stocks by observing the market.
How a market maker works
Every day, market makers make large numbers of trades, maintaining high liquidity in exchange-traded assets. The continuous work involves a multitude of transactions:
buying and selling assets at the request of a client;
brokerage to earn on the spread;
Confrontation with the market - sale of shares when prices are rising and vice versa, in order to maintain the balance of supply and demand.
At the same time, the analysis of the situation at the exchange is not in the usual for traders horizontal variant, but in the vertical. The market makers have access to the order book, where they can see not only buy and sell operations, but also the pending orders, stop-losses, and take-profits. They evaluate market trends, potential earnings, and the reliability of the stock, notifying smaller dealers of withdrawals. The bids are put together, and a deal is struck that is as favorable as possible for all parties. If there is no suitable buyer or seller on the exchange, the company that has a contract with the exchange is obliged to act as one.
The earnings of market makers are made up of several components:
payments from the exchange;
a portion of the spread from the execution of orders of investors;
The main part of the income is the exchange payments under the contract, because the purpose of the market maker is to maintain a stable liquid market.