Science Fair Project Encyclopedia
A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the spread (i.e. the difference) between the buying and selling price.
Most stock exchanges operate on a matched bargain or order driven basis. In such a system there are no designated or official market makers but market makers nevertheless exist. When a buyer's bid meets a seller's offer (or vice versa) the stock exchange's matching system will decide a deal has been executed.
On the London Stock Exchange (LSE) there are official market makers for many securities (but not for shares in the largest and most heavily traded companies, which instead use an automated system SETS .) Some of the LSE's member firms take on the obligation of always making a two way price in each of the stocks in which they make markets. It is their prices which are displayed on the Stock Exchange Automated Quotation system , and it is with them that ordinary stockbrokers generally have to deal when buying or selling stock on behalf of their clients.
Proponents of the market making system claim market makers add to the liquidity and depth of the market by taking a short or long position for a time, thus assuming some risk, in return for hopefully making a small profit. On the LSE one can always buy and sell stock: Each stock always has at least two market makers and they are obliged to deal.
This contrasts with some of the smaller order driven markets. On the Johannesburg Stock Exchange , for example, it can be very difficult to determine at what price one would be able to buy or sell even a small block of any of the many illiquid stocks because there are often no buyers or sellers on the order board. However, there is no doubting the liquidity and depth of the big order driven markets in the USA.
Unofficial market makers are free to operate on order driven markets or, indeed, on the LSE. They do not have the obligation to always be making a two way price but they do not have the advantage that everyone must deal with them either.
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