Ever wonder when you are electronically trading, and you call your broker and tell them that you want to sell one thousand shares of your GE stock and within minutes of their quote it is done and over with? If so, then you are dealing with the how and who of a market maker, so did you Ever Wonder How Do Market Makers Work or how market making works?
With that in mind the market maker, the trader firm or broker, is the creator of markets where you buy and sell underlying instruments in bulk fashion. For this example, we will focus on securities.
Whenever they have securities to sell, they should have buyers in their cross hairs when opening a new market to sell which help assist in the liquidity and robustness of a double-sided market.
The most basic answer to what is a market maker is that they are either a firm or a broker who takes on all the risk of a specified number of stock shares for an agreed upon price to trade them. During electronic trading, the market maker displays a given quote for both buying and selling of the stock shares, usually in bulk consumption, and is always a guaranteed transaction. A market maker is an essential facilitator in the secondary market in increasing stock liquidity and long-term growth potential of the markets.
Competition is very fierce for a market maker, where the real deal lies in the customer orders continuously flowing for the buying and selling of securities. Once a consumer makes an order to buy, the market maker either sells from their inventory or gathers a compensating order. There can be any one or more than fifty market makers for any given security depending on the volume of the stocks daily average of trading.
How do Market Makers Operate?
If you are wondering how do market makers operate and make a profit then the most straightforward answer is a market makers spread. A market makers spread is the difference between the buying price of the securities and the selling price. With that in mind, because the market maker can sell or buy securities at any given time, the “spread” is the actual profit made off of each and every trade.
The market makers must define and capture a buyer for every sale and a seller for every buyer. The market is created when over some time the market maker quotes bids and offers, and they have to maintain a buy and ask quote within each market maker spread. To make a profit the market maker has to buy or sell one thousand of the quoted securities then they can exit, the market. After the exit, the market maker can then create a new market by quoting a new buy and ask price for the previous securities.
The first question should not be how do market makers operate and make money, but that their first obligation is to create liquidity for their clients, then the profits can be had. By law, a market maker must give their clients the most competitive price for both the buy and ask quotes for the securities which provide the most secure double-sided market.