Market maker is a market participant who is ready to buy and sell assets on a regular basis at a public quote, earning on the spread (the difference between the bid and ask prices). The market maker’s job is to create and maintain liquidity in times of weak market bid and ask.
Market makers are an integral and necessary part of the market. They do not always make money on price movements, but they provide the comfort of transactions, even when traders do not know who they are dealing with on the other side.
Main responsibilities of Market Makers:
- retention of quotes in a certain range;
- provision of additional liquidity as required;
- preventing price gaps.
There are two types of market makers:
- Order takers. They trade as an intermediary for the client.
- Order makers. They track the dynamics of movements of certain assets, making forecast price expectations based on this data.
Market makers can assess trends in the securities market, their reliability and expected yield, later informing smaller institutions about them. The best deals are put together and the deal is made.
Market makers play a huge role in a situation where the market is dominated by sellers or buyers. This happens during the release of positive news, or, conversely, during a panic reset due to something negative.
In such situations, the market maker is obliged to conclude transactions for the purchase (sale) of the asset, even though it is unprofitable for him. As its main goal is not to make money, but to neutralize bid and ask, as well as to maintain the market liquidity. Thus when the price rises, the Market Maker sells, and when the price falls, the Market Maker buys.