Market Maker

A market maker is a securities broker which acts as a counterparty to trades by committing to purchase and sell specific securities at the going market rate. By guaranteeing the purchase and sale of securities to investors, market makers help to maintain the liquidity of one or more securities which they make a market for.

After a market maker has purchased securities, they put them up for sale to brokers and investors. They add a markup to the price which they paid for the securities in order to earn a profit. Market makers allow investors to buy or sell securities immediately without having to wait until their broker has found willing sellers or buyers.

Market makers may be individual investors, or they may be institutional investors like brokers, investment funds or banks. The primary requirement is that they own a very large amount of a specific security and are willing to buy and sell that security in large quantities.

Securities exchanges require the participation of market makers in order to provide buyers with a counterparty from which they can purchase securities. Market makers also provide sellers with a counterparty to whom they can sell securities. Securities exchanges may only list securities which are backed by market makers. Typically, securities exchanges have dedicated market makers which participate in them and back all of the securities listed. However, this is not always the case. Small stock exchanges and over the counter exchanges in particular often do not have dedicated market makers. Some may have market makers for specific securities only. Others have no market maker participants at all, in which case only traded securities which are backed by external market makers are instantly tradable.

Example of a security which is backed by a market maker: You want to buy 100,000 shares in a stock which is covered by a market maker. You place a buy order with your broker, and the broker immediately buy the shares from a market maker at their going offer. The market maker profits on the spread between the lower price at which they bought the shares and the higher price which you pay. When you want to sell the shares, you simply place a sell order with your broker, and the broker immediately sells the shares to a market maker at their going bid. The market maker then offers the shares on the stock market at a price higher than the price they paid you for your shares.

Example of a security which is not backed by a market maker: You want to buy 100,000 shares in a stock which is not covered by a market maker. You place a buy order with your broker, and the broker looks for sellers from whom to buy the shares. The broker may find a willing seller immediately. However, they also may not find a seller at all, or they may only be able to find 50,000 shares in the stock on offer. Depending on the liquidity of the stock in question, it may take hours, or even days to buy the full 100,000 shares and fill the order. You may face the same problem when you sell the shares. Depending on the liquidity of the stock, it can take a long time to find enough willing buyers and fill the order. In the meantime, the value of your shares may increase or decrease.

More on this topic:
Swiss securities broker comparison

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