A market maker is a company or individual that regularly buys and sells securities at quoted prices on an exchange to provide liquidity to the market. Their role is to meet the market demand for securities during the trading day.
The US Securities and Exchange Commission defines a market maker as “a company that is willing to buy and sell a particular class of stock on a regular and ongoing basis at a quoted price.”
According to FT Lexicon, a market maker “quotes buy and sell prices for the securities it holds in its inventory, and is willing and able to buy or sell those securities at any time for its account. .”
Market makers ensure that there is always a two-sided market with reasonable spreads for certain securities by posting bid and ask prices as often as needed.
In the United States, the term is often heard in the context of “over-the-counter” (OTC) markets, such as Nasdaq.
We call those willing to buy and sell stocks listed on exchanges, such as the New York Stock Exchange or the London Stock Exchange, “Third Party Market Makers”. “.
How Market Makers Make Money
Market makers are compensated for the risk they take by fixing the difference between the ask and ask prices (this is called the bid-ask spread). For example, a market maker might buy shares from a seller for $50 per share (ask price) and then sell those shares to a buyer for $50.05 (ask price). buy). Although the spreads are not large, market makers can trade millions of securities per day.
NASDAQ
NASDAQ market makers are “independent brokers that compete to win investor orders by posting buy and sell interest on securities listed on NASDAQ.” According to Nasdaq, “nearly 300 registered companies are committing capital to the securities they choose to market.” Market makers are not exclusive agents and can have more than one market maker per share.
NYSE
The NYSE differs from the NASDAQ in that it has Designated Market Makers (DMMs), formerly known as “experts”, who act as the official market makers for a given security. According to the NYSE, “the DMM’s obligation is to maintain a fair and orderly market for the securities assigned to them.” If investors sell, DMM usually buys and vice versa.
Canadian Stock Exchange
The Canadian Exchange says on its website that it assigns market-making duties based on:
- the franchisor’s importance in a given area.
- dealer commitment to provide a competitive two-sided market.
- the franchisee’s ability to meet the commitments stated in the application.
- a specific request from an issuer.
London Stock Exchange
According to the London Stock Exchange, “a member firm may choose to register as a market maker for one or more securities but must be able to meet the obligations associated with this role”. A basic requirement is that the market maker “price and trade on the order book or off the order book, or both”.
