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Encyclopedia > Market maker

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 bid/offer spread. Firm can have several meanings: Firm - a loose legal term for a company. ... Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... The word commodity is a term with distinct meanings in business and in Marxian political economy. ... The bid/offer spread is the difference between the buying (bid) and selling (offer) price of the same stock or currency transaction. ...

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 that a deal has been executed.

In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have a single exchange member, known as the "specialist," that acts as the official market maker for a given security. In return for providing a required amount of liquidity to the security's market, being on the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders, and attempting to prevent excess volatility, the specialist is granted various informational and trade execution advantages. New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE) , also nicknamed the Big Board, is by far the largest stock exchange in the world (by dollar volume) and second largest by number of listings. ... The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... Volatility is the standard deviation of the change in value of a financial instrument with a specific time horizon. ...

Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to "naked short" a stock, i.e. selling it without a borrow. In most situations only official market makers are permitted to engage in naked shorting. NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations ) is a U.S. electronic stock exchange. ...

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. The Source by Greyworld, in the new LSE building Paternoster Square. ... The word set, which is among the words with the most numerous definitions in the English language (at 464 definitions according to the Oxford English Dictionary), may have one of the following meanings. ... A stock broker or stockbroker or stock brokerage is someone or a firm who performs transactions in financial instruments on a stock market as an agent of his/her/its clients who are unable or unwilling to trade for themselves. ...

Proponents of the official 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. Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... Look up depth in Wiktionary, the free dictionary In classical physics, depth is a distance measured vertically from top to bottom (height) or horizontally from outside to inside (thickness). ... To meet Wikipedias quality standards, this article or section may require cleanup. ... In finance, a long position in a security, such as a stock or a bond, or equivalently to be long a security, means the holder of the position owns the security. ...

This contrasts with some of the smaller order driven markets. On the Johannesburg Securities 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 of the big order driven markets in the U.S. The Johannesburg Securities Exchange (JSE) is the largest stock exchange in Africa and one of the ten largest in the world. ...

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.

See also

Day trading most commonly refers to the practice of buying and selling stocks during the day such that at the end of the day there has been no net change in position: for every share of stock bought an equivalent share is sold. ... Digital gold currency exchangers (DGCEs or digital gold currency exchange providers) are market makers which buy and sell digital gold currency in exchange for fiat currency and a transaction fee. ... What follows is a list of over 250 Wikipedia articles on finance topics. ...

External links

  • Market Manipulation or doing their job?

  Results from FactBites:
Market Maker Exemption From Net Capital Rule (1095 words)
In addition, market makers that engage in more than occasional off-floor transactions, that are not directly related to their primary on-floor business, to the extent that the off-floor transactions are more than 25% of their total transactions will be required to file annually audited financial statements.
These market makers would be allowed to withdraw equity capital, however, so long as their tentative net capital, i.e., net capital before haircut and undue concentrations deductions, is equal to at least 25% of their total deductions and 120% of their required minimum net capital before haircuts.
In the case of a market maker subject to the net capital rule, the notice provisions of paragraph (e)(1) and the temporary restrictions on withdrawal of net capital of paragraph (e)(3) would be based upon tentative net capital rather than net capital.
ASX Option Market market makers (625 words)
Market makers compete against one another while trading on their own account and at their own risk.
Market Makers who choose to make a market on a continuous basis are obligated to provide Orders continuously for certain percentages of time* in eighteen series per Underlying Security, encompassing three calls and three puts in any three of the next six expiry months.
Market makers who choose to make a market in response to Quote Requests must provide orders on request for certain percentages of the time* for all Series up to nine months maturity in a Class for the Minimum Quantity and at the Maximum Spread.
  More results at FactBites »



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