What Is a Market Maker?
Market Maker is synonymous with the securities forex market, refers to the securities market, by an independent securities operating legal person with a certain strength and credibility as a licensed dealer, constantly to the public investors to report the purchase and sale price of certain securities (i.e., two-way quotation), and at that price to accept the public investors’ buying and selling requirements, with its own funds and securities and investors to carry out securities trading. Buyers and sellers do not have to wait for the counterparty to appear, as long as there is a market maker to assume the counterparty can close the transaction. Market makers use this constant trading to maintain market liquidity and meet the investment needs of public investors. The market maker compensates for the cost of the services provided by buying and selling the appropriate difference in the quotation and realizes a certain profit.
- Consistently meet certain criteria for the preservation of transactions and the performance of financial responsibilities.
- Uninterruptedly preside over the markets of both buyers and sellers and execute trading orders at the best prices in accordance with the limits.
- Issue effective buy-to-let quotes (act as liquidity providers to address under-delivery).
- Report the transaction within 90 seconds of the completion of the transaction for public disclosure.
Obligations to market makers, with the following privileges:
1, information, enjoy the record of all traders’ buy and sell, in order to keep abreast of the occurrence of unilateral market omens.
2, the priority of margin financing. In order to maintain the liquidity of the market, market makers must always have a large amount of chips to maintain transactions and certain funds backed by, but this is not enough to ensure the continuity of transactions, when large transactions, market makers must have a legal, effective, low-cost financing channels, priority financing and margin trading.
3, under certain conditions of the shorting mechanism. When most investors in the market are long, market makers have limited leverage in their hands and are bound to enjoy a certain percentage of short trades in order to maintain the continuity of trading.
4, tax relief. Market makers trade frequently, while bearing the both sides of the buy and sell transactions, to buy and sell, to buy for sale, to earn profits in the bid-and-sell spread, is bound to require tax relief.
- Market maker market
The real market maker market should consist of two levels: the first is the retail market between the market maker and the investor, and the second level is the wholesale market between the market maker and the market maker.
The securities market maker market, including the “composite” securities market and the “single” securities market maker market (OTC market), in which the “composite” securities market can be divided into “hybrid” stock exchange market (e.g. the New York Stock Exchange) and “parallel” stock exchange market (such as the London Stock Exchange).
- Market maker system
Market maker system is to market maker quotation to form a trading price, driving the development of trading securities trading.
The market maker system is a kind of securities trading system which is different from the bidding trading method, and is generally adopted by the over-the-counter market.
Traditional trading is by an expert to deal with hundreds of listed companies stock trading, and the market maker system is a one-to-one relationship, that is, a group of market makers for a listed company services. What’s more, market makers provide money for trading, in which they buy stocks with their own money before selling. These practices have greatly increased the liquidity of the market and increased the depth and breadth of transactions.
It is precisely because the market maker system has the above functions and adjusts the uneven situation of the buying and selling market, at any time to ensure the provision of two-way price characteristics, decided that its function is achieved on the premise of having high-quality market makers. The choice of market makers is more stringent, only those operating norms, strong capital, large-scale, familiar with market operations, and strong risk control ability of businesses can assume.
In general, market makers must have the following conditions:
1, with strong financial strength, so as to establish sufficient inventory of the subject goods to meet the trading needs of investors.
2, with the ability to manage commodity inventory, in order to reduce the risk of commodity inventory.
3, to have accurate quotation ability, to be familiar with their own business of the subject matter, and have a strong analytical ability.
As a market maker, its primary task is to maintain market stability and prosperity, so market makers must fulfill the “market-making” obligation, that is, in order to avoid market prices as much as possible, at any time to assume the two-way quoting task of the securities, as long as there is a buying and selling market, to quote.
- Operational content
No one would do it if there was no profit on this matter. The steady profit in this is the spread. At the same time accept the sale of market makers, because at the same time, the sale price is a certain gap, of course, this gap is generally fixed, but there is also the possibility of non-fixed.
Suppose a market maker A is the standard pencil for operating a globally uniform business. (Assuming the earthlings all use this kind of pencil) the market maker will give a quote. Bid bid price two-way quote (relative to investor). Make the simplest assumption. This pencil is 1 yuan for the asking price, 1 yuan 1 is divided into the bid price, which means that at this moment all buyers of pencils will buy 1.01 yuan, all those who sell pencils to market makers will sell for 1 yuan. (The spread between 1.01 and 1 is the spread, the spread is the basis point, and if the minimum quote is 1 point, then the fluctuation of 1 cent is the fluctuation of one basis point).
Spread means a few basis points short. Popular understanding is the difference between the bid price and the asking price. If one million people buy 2 million pencils at this moment, and half a million people want to sell 2 million pencils, then buy money (market makers get money) . . . 2 million times 1.01 yuan . . . 2.02 million. And selling money (market maker loses money) – 2 million times 1 yuan – 2 million. Market maker’s profit is 2.02 million-2 million and 20,000. The market maker made a profit of 20,000. Therefore, the spread is the stable profit obtained by the market maker, but also the biggest profit after the market maker to make a big, but in fact the spread is not always so fixed. Here is the characteristics of the analysis spread is as follows
Spreads protect the market maker’s quoting costs. Quotes obviously have costs, here is mainly time costs, but the market maker internal to do between market makers, if in the processing of position quotation delay, (later talks) lead to unnecessary losses of market makers, so the spread is generally set to take this factor into account. Therefore, the spread cannot be infinitely high.
Cost changes, sometimes spreads are not constant, with market changes and changes, which can effectively protect the interests of market makers. Continue with the example just now: when the price volatility is intense, the spread becomes larger, and when the price fluctuation is small, the spread is small. Although it may still average $0,01. But if the volume distribution is different will make the market maker’s overall profit ups and downs, but in any case, spread as a relative fixed profit will be the market maker can not give up.
But this is not the whole operation of the market maker, but the operation of the market maker is one of the simplest principles and purposes. Below we introduce the market maker’s quotation principle: This is also one of the core secrets of the market maker. Let’s do a simple analysis in the hope that this relatively complex problem can be explained simply.
Continue with the example just now, set several situations to illustrate the problem: set the asking price of 1 yuan and the bid price of 1.01 yuan, sell and buy are 2 million funds, this balance is not common, more is a dynamic imbalance. Here’s a dynamic assumption: when the price is $1, assuming more than 1 million head and 2 million short, (initial state) of course the price can choose to go up or down.
If upside, long profit, short loss, but whether the short stop loss, how many stop loss is not known, but we would say that if the time is long and leave at the same time, then the market maker must take profit, although all long short at the same time exit is unlikely, but if immediately down there is such a potential risk. So in general, when the long-short imbalance, the choice of the side with less position funds is a necessity for market makers.
But this time if the long position, short quickly reduce the position, to reach a balance state, we named balance A (long short break-even speed balance, that is, long single profit speed equals short loss speed, When the price reaches 1.5 yuan when the long capital 2 million, and short funds are still 1.6 million, if at this time continue to go up sharply once the long plus position, short loss rate is slower than long profit, there will be a long profit equal to short loss state, this state is balanced B (including forward profit and loss and that is) Period profit and loss)
At this time is basically the price inflection point, from another point of view, more than 2 million funds are in 1 yuan to 1.5 yuan to establish, the average price is generally less than 1.4 yuan and the average price of short in 1 yuan, then the price is generally to 1.4 yuan and 1 yuan oscillation, this is dynamic A .In dynamic A long and empty at the same time leave the market maker is not lost, while either side of the large off-market average effect will not let the market maker lose money. Of course, there is also dynamic B, such as any increase in the total position of the quoted party.
We say that any equilibrium state is unsustainable, the market selection will generally choose from balance A, to balance B, and then back to balance A, the middle dynamic process includes dynamic A and dynamic B this is the general market maker quote logic. There will never be such a price, all investors leave the market at the same time the last market maker to lose money, then the market is running in a price range.
For example, in the gold and silver market, in an absolute positive or negative situation, the general performance is a short-term strong out of the unilateral market, because a moment to buy, meaning that the forward sale, selling is naturally cheaper and cheaper, and buy naturally is more expensive the better, so if there is a large amount of short-term buying, then the short-term upward momentum will be very strong, and vice versa if a large number of sales, it reflects diving. How do market makers identify absolute good and negative?
Of course, the first is a surge in entry funds, which will be decisive, and the second is that market makers get relative time-first good news. The purpose of market makers’ quotations is to calm their own risks, not to gain losses from customers, but such behavior objectively results in losses on a relatively large part of the funds, or in a loss-making state.
But such a system is not perfect, because there are leverage and the existence of the rules of open positions, if the market maker in accordance with their own needs at will, it is likely to let customers repeatedly burst positions, even if the market maker has sufficient credibility, can not guarantee that it is not based on their own interests to engage in fraud.