The Market Maker

By Jessica Barnes | Posts

Jul 25

The Market Maker

You have been trading in the market for years. There was a time when you used to trade and were given the share certificates by your broker. This then changed and the electronic trading method came into existence which makes it easy for you to buy and sell shares just by clicking on your mouse.

In the process did it ever strike you about how you were able to buy and sell the stocks at a moment’s notice? The speed with which this is done and how simple the whole process is something that you must have wondered about. Todayall that you need to do is to place a trade with the broker and it takes just seconds for the trades to get executed. It is interesting to know what happens when you place a trade on the trading platform.

There is someone on the other side who sells the stock when you place a buy button. Similarly, there is someone on the other side who is buying the stock that you are selling. There is very less likely that you will have someone at the other end who is exactly interested in buying or selling the same number of stocks to you. However, still, you are able to do that. Then how is this possible?

Meet the market maker

The market maker, Crypto CFD Trader is a trading software, is basically a brokerage firm or a bank that is there present every time with a bid and ask price. The market order that you place to either buy or sell a stock is actually taken by the market maker. This is even when the market maker may or may not have a buyer or a seller at the other end. When they do this all that they are doing is to create a market for the stock. If the market makers were not there then this would mean that the traders would have to wait longer to buy or sell the stocks. This would reduce liquidity and increase the cost of trading and thus enter or exit the trade would get very difficult.

How do the market makers earn

The market maker has to earn too and he has to be compensated because he takes a lot of risks. The market maker could have brought some shares from you only to see that the price of the stock starts to fall. To cover this, the market maker maintains a spread on every stock that he covers. This is seen in the difference in the ask and the bid price. The difference is what the market maker pockets. And if you see the huge number of stocks that are traded each day you know that the money is a substantial amount.

Thus it is the difference between the ask and the bid price that goes into the money makers pocket. You will always see that if the price of a share issue 100, then you will be able to sell it for a lesser amount, say 99.95 and when you go to buy it you will have to pay a higher amount, say 100.05. The difference looks very less but it makes a huge amount when you calculate the number of shares that are traded on the exchange each day.

 

About the Author