How Market Makers Make Money
For those who would like to buy some properties or make an investment, the help of a market maker is always needed in making a transaction successful and making buying or selling possible at any time.
Aside from learning how market makers make money, one should also know who they really are, what the advantages of them being present are and what would happen if there were no market makers at all.
Market Makers: Who They Really Are
Stock traders and option traders often linger in the dilemma of who will buy something they sell and who will sell to them if they want to buy something. In a typical liquid market, there will always be someone queuing to buy or sell a specific stock. However, there are still instances wherein nobody is actually queuing. This is the part wherein market makers come in handy. Market makers can be either an individual or a firm’s representative, with the main function of aiding in market making in a certain options exchange. They do this through bid and offer making for his or her account when public sell or buy orders are absent so that they can guarantee that the market transactions will run as smoothly and continuously as possible. Once the option trader place the order of buying a certain option stock, the market maker, in return, will then sell that stock option to the trader from his or her own reserve or portfolio for the certain stock option and exactly the opposite happens if the option trader will want to sell something. This kind of transaction will make the market orders moving continuously, eliminating any sudden ditches and surges that may result from selling and buying imbalance.
Market Makers’ Secret in Making Money
The market makers must be properly compensated for every risk that they take in making a transaction. For instance, he might buy a certain share in a company but its stock price falls abruptly right before a buyer can buy the stock, something that is not favorable for both parties. These things can be prevented from happening once the market makers will maintain a spread on all of his covered stocks. They do this buy adding a little price to the actual ask price of the share when they sell it to the prospective buyer. This is how market makers make money.
Market Maker System: Its Advantage
With the help of a market maker, the market place is being decentralized so that the volatility and liquidity will remain varied. This will then improve the totality of the liquity and market manipulation will then be more difficult to do.
What Takes Place in the Absence of Market Makers
Some option traders have a developed a negative impression of market makers as individuals who buy things at very low prices and sells them at much higher value. But what will actually happen if there are no market makers at all? If market makers are not present, there will always be an imbalance in the buying and selling situation. Sellers will tend to sell stock at extremely high prices while buyers will tend to push their price much lower, making it worthless already. The market maker is the one that creates liquidity of prices so that big up and downs will be eradicated and a liquid market will be available for everyone.
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