Market Maker

Business, Legal & Accounting Glossary

Definition: Market Maker


Market Maker

Quick Summary of Market Maker


A brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintaining liquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be an incentive for brokers to recommend securities simply because the firm makes a market in that security.



Video Guide For Market Maker




What is the dictionary definition of Market Maker?

Dictionary Definition


market maker is a company, or an individual, which provides market liquidity buying and selling securities.

A market maker quotes both a buy and a sell price in a financial instrument, hoping to make a profit on the bid-offer spread, or turn.

The U.S. Securities and Exchange Commission defines a ‘“market maker’” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price.


Full Definition of Market Maker


A market maker is a dealer on the London Stock Exchange, who acts as a wholesaler (i.e. quotes buy and sell prices to brokers) for the shares in which he is registered to trade as a principal. Market makers fulfil buy and sell orders from brokers and create a marketplace for the buying and selling of shares to match supply and demand.

The market maker makes a profit by committing his company’s capital, aiming to buy low and sell high. There is always the possibility that he may buy high and sell low, thereby incurring a loss.

The market maker who buys 10,000 shares of Marks & Spencer at £2.58 will attempt to sell them at a higher price e.g. £2.60, thereby realising a profit of £200. Conversely, he could sell stock for £2.60 and later buy it back for £2.58, again realising £200 profit. However, market forces can cause the market maker to sell stock at £2.58 then, due to high demand, have to repurchase (recoup his short position) at a higher price of £2.64, thereby losing £600.

Stock prices constantly change, reflecting the supply and demand for those stocks. Low supply and high demand lead to high prices. High supply and low demand lead to lower prices.

The market maker is obliged to honour the price he reflects on screen in the size he is showing. This size is often larger than the NMS, which is the minimum size in which a market maker must quote a two-way price.

If a broker wants to buy or sell a larger quantity of shares than the market maker is showing, i.e. showing 5×5 but the broker wants to buy 10,000 shares, the market maker may refuse to trade on these grounds. He is, however, still duty-bound to sell the broker a minimum of 5,000 shares at the price shown. Furthermore, he may be able to offer him the full 10,000 shares, but the market maker can name the price.


Related Phrases


specialist
auction market
best-execution requirement
capital commitment
ghosting
inside market
inside spread,
last-sale reporting
nominal quotation
passive market-making
real-time trade reporting
two-sided market
facilitation


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/market-maker/
Modern Language Association (MLA):
Market Maker. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
March 28, 2024 https://payrollheaven.com/define/market-maker/.
Chicago Manual of Style (CMS):
Market Maker. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/market-maker/ (accessed: March 28, 2024).
American Psychological Association (APA):
Market Maker. PayrollHeaven.com. Retrieved March 28, 2024
, from PayrollHeaven.com website: https://payrollheaven.com/define/market-maker/

Definition Sources


Definitions for Market Maker are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 22nd November, 2021 | 0 Views.