Market maker From Wikipedia, the free encyclopedia
A market maker or liquidity provider is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn.[1][2] The U.S. Securities and Exchange Commission defines a ‘“market maker’” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price. [3]
A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that he or she will take the position in a particular assigned security, option or option index.[4]
In stock exchange
Market makers that stand ready to buy and sell stocks listed on an exchange, such as the New York Stock Exchange, are called "third market makers." [5] Most stock exchanges operate on a "matched bargain" or "order driven" basis. When a buyer's bid price meets a seller's offer price or vice versa, the stock exchange's matching system decides that a deal has been executed. In such a system, there may be no designated or official market makers, but market makers nevertheless exist.
New York
In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as "specialists", who act as the official market maker for a given security. The market makers provide a required amount of liquidity to the security's market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders. In return, the specialist is granted various informational and trade execution advantages.
Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to naked short a stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting. Recent changes to the rules have explicitly banned naked shorting by options market makers.[6][7]
As of October 2008 there were over two thousand market makers in the USA[8] and over a hundred in Canada.[9]
In liquid markets like the New York Stock Exchange, nearly every asset has open interest, providing two benefits: price takers can buy or sell at any time, and observers can continually monitor a precise value of every asset.[10]
A prediction market, or market explicitly designed to uncover the value of an asset, relies heavily on continual price discovery holding true. [10] Prediction markets benefit from automated market makers, or algorithmic traders that maintain constant open interest, providing needed liquidity to the markets that would be difficult to provide naturally. [10]
How a market maker makes money
The difference between the price at which a market maker is willing to buy a stock and the price that the firm is willing to sell it is known as the market maker spread, or buy-sell spread.[14] Due to the fact that each market maker can either buy or sell a stock at any given time, the spread represents how much profit the market maker earns on each trade. Market makers also provide liquidity to their own firm's clients, for which they earn a commission. [14]
reference source
http://en.wikipedia.org/wiki/Market_maker
A market maker or liquidity provider is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn.[1][2] The U.S. Securities and Exchange Commission defines a ‘“market maker’” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price. [3]
A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that he or she will take the position in a particular assigned security, option or option index.[4]
In stock exchange
Market makers that stand ready to buy and sell stocks listed on an exchange, such as the New York Stock Exchange, are called "third market makers." [5] Most stock exchanges operate on a "matched bargain" or "order driven" basis. When a buyer's bid price meets a seller's offer price or vice versa, the stock exchange's matching system decides that a deal has been executed. In such a system, there may be no designated or official market makers, but market makers nevertheless exist.
New York
In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as "specialists", who act as the official market maker for a given security. The market makers provide a required amount of liquidity to the security's market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders. In return, the specialist is granted various informational and trade execution advantages.
Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to naked short a stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting. Recent changes to the rules have explicitly banned naked shorting by options market makers.[6][7]
As of October 2008 there were over two thousand market makers in the USA[8] and over a hundred in Canada.[9]
In liquid markets like the New York Stock Exchange, nearly every asset has open interest, providing two benefits: price takers can buy or sell at any time, and observers can continually monitor a precise value of every asset.[10]
A prediction market, or market explicitly designed to uncover the value of an asset, relies heavily on continual price discovery holding true. [10] Prediction markets benefit from automated market makers, or algorithmic traders that maintain constant open interest, providing needed liquidity to the markets that would be difficult to provide naturally. [10]
How a market maker makes money
The difference between the price at which a market maker is willing to buy a stock and the price that the firm is willing to sell it is known as the market maker spread, or buy-sell spread.[14] Due to the fact that each market maker can either buy or sell a stock at any given time, the spread represents how much profit the market maker earns on each trade. Market makers also provide liquidity to their own firm's clients, for which they earn a commission. [14]
reference source
http://en.wikipedia.org/wiki/Market_maker
