Market makers – people who make the market

market makers

There is probably not a single trader or investor in the world who has not heard of market makers. However, not everyone, even an experienced trader, can give a detailed definition of this market participant, and even more so talk about the intricacies of their work and importance. If you belong to this group of traders, then in this article we will try to fill this gap in your knowledge of the financial markets. We will tell you who a market maker is on the stock exchange and on Forex, and touch on the issues of supply and demand that he provides.

Market makers are key participants in exchange trading

If we turn to English, then “market maker” is translated as “creator of the market.” In fact, a market maker is a professional financial market participant acting in the interests of the exchange. Usually, a market maker has an agreement under which he performs special functions, but his priority task is to maintain the liquidity of a trading instrument.

Market makers are professional participants in exchange trading who keep it active and are always ready to make a market deal with any other player. Basically, market makers are large banks, various funds and investment companies, as well as brokers.

An interesting fact: the New York Stock Exchange NYCE does not use the term market maker at all. Such a market participant is called a “stock specialist”.

Market makers are indeed key market participants. In simple terms, when you want to sell, for example, a currency or a share, then someone must acquire your asset. Accordingly, on the contrary, if you want to buy something, then there must be someone who will sell it. Here, in order for both buyers and sellers to always be on the market, market makers are needed. In this case, two types can be distinguished:

– Institutional. A distinctive feature of this type of market makers is that they perform all their functions in a regulated manner. What does it mean? A legal entity (market maker) enters into an agreement with the exchange and acts strictly within its framework: it maintains prices, supply and demand, certain trading volumes, etc.

– Speculative. Market makers of this type mainly operate in markets where there is no centralized organizer of trading. An excellent example is the over-the-counter Forex market. Despite the spontaneity of the appearance of this type of players, they give the markets a fairly good stability. In addition to Forex, such markets include the interbank bond market, as well as the interbank loan market.

Trade - providing demand with supply

As we wrote above, one of the most important and responsible tasks of market makers is to ensure a balance in the market, including maintaining supply and demand. They do this in various ways, consider some of them.

– during the entire trading session, the market maker holds multidirectional positions, i.e. for sale and purchase. Purpose: to form a spread acceptable for all market participants;

– a market maker can act as a counterparty for traders’ orders, if at the moment there is no other counterparty at this price level.

The last point, in our opinion, is the most interesting. Based on the terms of the agreement with the exchange, the market maker undertakes to execute orders from traders to buy or sell at their own expense, if the required volumes, which are also called liquidity, are not available at current prices. The market maker can act as the second side of a trade transaction until the situation with supply and demand stabilizes. Why is this point so important? The thing is that such a “duty” of market makers eliminates significant price fluctuations in the market.

Stability of supply and demand is the key to normal exchange trading

Ensuring the stability of supply and demand is the most important task of any exchange. At first glance, it may seem that such harsh conditions for market makers can hurt financially. If, for example, we consider a situation where there are obligations to buy a falling asset. In fact, the risks tend to zero. Firstly, because in this way the market maker accumulates a position for a reversal. In the future, this can bring good profits. Secondly, losses can be compensated by the remuneration that the exchange pays, according to the contract. Meanwhile, strong fluctuations in the market still reduce the earnings of the market maker. The highest income is extracted in a calm market.

Many readers may be interested in the question, how much do companies that perform such functions earn? We can say with confidence that the income of market makers is quite impressive and is formed from several sources:

Earnings on the spread from trading transactions. The company acts as a counterparty and places orders in different directions, earning on the difference between the price of the seller and the buyer.
Remuneration directly from the exchange, according to the contract. Basically, it is formed from a part of the commission that other exchange players pay.

As you can see, normal exchange trading is possible only thanks to the responsible work of market makers. In this regard, at all sites, the requirements for candidate organizations are extremely stringent. You will not be able to meet any “stray” or irresponsible companies among market makers. Basically, these will be reliable and respected banks, reputable investment companies and funds with an excellent reputation, as well as large brokers with serious capital.

Global Market Makers of the World Economy

Within the framework of the topic under consideration, it is worth dwelling on the theory of globalism. We will not resort to the examples of Andy Warhol, and talk in detail about why Coca-Cola is drunk on all continents, “green” and reasonable consumption are in trend. Economic globalism has a deep history. However, it became more active after the collapse of the USSR. Since that period, the capitalist system has become the dominant model of the world economy. Does this mean that freedom and liberalism have come to the financial markets and turned them into balanced self-regulating systems, where there is no single control center? No, that didn’t happen. Financial markets, like other segments of the world economy, have governance institutions. Moreover, the financial industry in the last 20-30 years has become even more regulated in terms of national legislation, as well as international levers of influence on global demand and consumption, the strengthening of such organizations as the IMF, the World Bank, countries from the G20, G7, or OPEC. Suffice it to recall the “dance” of quotes on the currency and stock markets during the global covid-19 pandemic, when lockdowns were announced everywhere and global supply chains were disrupted.

With the advent of the energy crisis in 2022, the market makers of the global economy “announced” that the coronavirus was over. This factor disappeared from the daily news agenda and ceased to be the leader influencing the picture of financial markets. The same examples can be given with the prices of oil, wheat, etc. For examples of market maker intervention in the stock market, we refer you to Elon Musk’s Twitter. Many times his short statements deprived shareholders not only of sleep, but of decent sums due to the fall in the value of shares.

Of course, we will not leave in the world conspiracy theory. But I would like every private trader to be able to see the interconnections in the global economy on a larger scale, to consider it not through the click of one asset that is being traded. It is important to keep track of global market makers in order to make more accurate trading decisions every day on your account.

Market makers - participants that provide demand

In our opinion, in this article we managed to tell you about who market makers are, how important they are for stable exchange trading. Over the decades of existence of these market participants, a lot of false speculation has developed, especially among small traders trading in small amounts and volumes, who are also called the “crowd”. So, one part of traders is firmly convinced that market makers have information about where the price of an asset will go in the short term. The other part went even further and believes that market makers control prices themselves and always work against the “crowd”, profiting from it.

In reality, everything is completely different. Market makers are the same market participants that ensure demand and stability in the market. They bring real benefits to the market, because maintain market liquidity, the necessary turnover of trades, and also minimize the likelihood of price spikes. At the same time, market makers can also incur losses, although, admittedly, their activities are less risky than those of an ordinary private trader.

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