Ever wondered who’s on the other side of your stock or options trade?
Well, meet the market maker. These folks make it their job to keep the market running smoothly. But what exactly is a market maker, and what do they do?
What you'll learn:
➤ What Is a Market Maker?
A market maker is like the unsung hero of the financial world. Their main gig is to keep the markets ticking along nicely. Whether you’re buying or selling, they’re there, ready to be the other half of your trade.
Even for less popular stuff that doesn’t get traded much, market makers step up to the plate. They’re the ones providing liquidity and making the market go round. If you want to buy or sell, they’re the go-to people.
➤ What Market Makers Do
Practically speaking, market makers do their magic by quoting prices for the stuff they have in their inventory. Registered market makers have to match orders from their own stash within the price range they’ve quoted. That way, they make trades happen fast and clear.
Now, let’s talk lingo. The highest price a buyer’s willing to pay for something is called the “bid.” The lowest price a seller’s willing to take is the “ask.” Typically, the bid is lower than the ask, and the difference between the two is the “bid/ask spread.”
Market makers set prices based on how much stuff they have and how much folks want it. Popular stuff like Apple (AAPL) has lots of trading action, so the spread is usually tiny. But if something doesn’t get traded much, the spread gets wider.
➤ How Market Makers Make Money
Market makers are in it to win it, and they make their dough from the bid/ask spread. Even if the spread’s teeny-tiny, market makers handle loads more trades than the average Joe, so it adds up.
For less busy and not-so-popular stuff, wider spreads mean fatter profits for market makers. They also make bank during wild market swings.
When things get crazy and lots of folks want to buy or sell, market makers jump in, buy up stuff, and then sell it when things settle down at a sweeter price.
The New York Stock Exchange has these cool cats called “designated market makers” (DMMs). They help make sure the opening and closing auctions go off without a hitch. These DMMs are like the specialists of old.
➤ Market Makers Rules
Now, you might’ve heard some wild stories about market makers scheming to mess with regular traders. But in reality, their job is to keep things smooth. They play by the rules set by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Some big names in the market maker game are Goldman Sachs (GS), Credit Suisse, Citadel Securities, and TD Securities. But not all the big financial players are market makers.
So, next time you make a trade, you’ll know there’s a market maker in the shadows, making sure the wheels keep turning. They’re the unsung “heroes” of the market.
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