Finance: What is a market maker?

What is a market maker? A market maker is an institutional member of an exchange that displays public willingness to trade by listing bids and offers. As exchange members, they are subject to the rules of and oversight by that exchange’s regulatory body. Without market makers, exchanges would be unable to provide liquidity in the markets.

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics
Terms and ConceptsBanking
Bonds
Company Management
Derivatives
Econ
International
Investing
Managed Funds
Stocks
Tax
Trading

Transcript

00:19

has to be divided into segments or sections or sub

00:22

groupings of aa few stocks or bonds in which the

00:25

specialist trades and that specialist volunteers there time because they

00:30

loved it well actually know that not all true they

00:32

get paid a lot Ah lot When things go well

00:35

how are they paid Well through spread and not the

00:38

warm butter kind Instead spread refers to the money value

00:42

between a bid and an ask price under a market

00:44

maker structure of trading securities No more wire hangers a

00:52

plastic hanger company is publicly traded on an exchange like

00:56

nasdaq where buyers bid for a price to purchase and

01:00

sellers asked for a price to trade no more Wire

01:04

hangers is bid this moment at thirty seven twenty three

01:07

a share by buyers willing to pay by right now

01:10

at that price and is being asked at this moment

01:14

at a price of thirty seven thirty one Note the

01:16

eight cents a share difference in the share prices that

01:19

def is the spread between the two prices and it's

01:23

worth noting that in extremely volatile stocks the spread widens

01:28

and in boring highly liquid stocks which don't move much

01:32

the spread titans or is narrower that is on a

01:36

volatile equivalent of no more wire hangers The spread might

01:39

grow to twenty or thirty cents a share whereas a

01:42

boring name that pays a big dividend and the stock

01:45

never moves much We're thinking t here well that spread

01:48

might be just three or four cents So why grow

01:51

Well Because a market maker in a volatile stock doesn't

01:54

want to be caught losing money on her inventory The

01:58

market maker never once to be punished for providing liquidity

02:02

and market makers provide liquidity for stocks bonds and well

02:05

basically anything else they think they can generate revenue from

02:08

spreads in If no more wire hangers suddenly gap down

02:12

to thirty seven Ten a share Well it would be

02:14

likely less than the average of what the market maker

02:18

pa paid for her quote inventory unquote in that stock

02:21

from which he was making a market in it Each

02:24

time the shares trade the market makers dip into that

02:26

spread to pay their bills and allow them to keep

02:29

doing business So that spread and it's not the type

02:32

that prince used teo sing about Okay so then specifically

02:36

what's a specialist i wouldn't have a movie Stallone wait

02:41

different kind of specialist in finance land a specialist is

02:46

the gala guy trading in a given stock that is

02:49

there a member of a stock exchange and they might

02:51

carry inventory of satan Ten million shares of microsoft trading

02:55

currently at around forty bucks a share Their offering msft

02:59

for sale it forty point oh five and they're our

03:02

buyer of msft this moment at thirty nine ninety one

03:06

and see there's a fourteen cents a share spread their

03:09

meaning that they make fourteen cents every time they transact

03:13

So let's say that specialist sells a million shares of

03:18

microsoft today earning a fourteen cents spread per share while

03:22

fourteen cents times a million one hundred forty grand and

03:26

clown Nice a day for one day's work so that's

03:29

a pretty widespread in the scheme of things because often

03:31

brokers have to tack on their own commission of a

03:34

few cents on either side and the specialist might in

03:37

fact be dealing from their inventory to brokers on both

03:41

sides of a transaction in which case they're spread I

03:45

even spread to the actual specialist might be just a

03:48

few cents times those million shares like four cents times

03:51

a million gets forty grand something like that It's still

03:53

a really good living But if it's so good then

03:56

why don't millions of people fight for that job Like

03:59

how hard it is Is it tio Just nod your

04:02

head and right down buy or sell and then a

04:05

number You think everyone who flips burgers at mcdonald's and

04:08

is afraid of robots taking their jobs would be killing

04:11

for this gig Well in order to be a specialist

04:13

Not only do you need you know special education and

04:17

a few siri's license exams but you also need capital

04:22

with which to buy inventory risky inventory which you'll hold

04:26

as if they are casino chips and you are more

04:29

or less the house So when the microsoft shares example

04:32

just to be a specialist in that one stock well

04:35

you have to raise something like one hundred million dollars

04:38

because you'll have to go into the market to start

04:41

and simply by you two or three and call two

04:43

and a half million shares at around forty bucks each

04:46

for a total cost of ahhh ondo or a silicon

04:49

valley unit That's What units called out here And yes

04:52

that's an investment in the stock could go up but

04:54

it could go down as well leaving you holding a

04:57

big fat smoldering bag of dog crap dot on and

05:01

also going whoever your investors or creditors workout one hundred

05:05

million dollars Like if microsoft has kind of evaporated you

05:10

know what could happen More risks will haunt your sleep

05:12

in that the stock and suddenly gap down three dollars

05:15

on a bad quarter at which point Your spreads must

05:18

widen to accommodate expected further volatility in the stock And

05:22

you then compete with other specialists who also make a

05:25

market in microsoft Well at any given time they may

05:28

want to go get out of trading in it and

05:30

undercut you Buy any or to a share leaving you

05:33

as the sole big owner of what will feel like

05:37

a stock version of the titanic Well the math gets

05:39

complex is the market gets volatile specialists use hedges and

05:43

human beings end up competing against a i'd driven black

05:47

box computers But the reason you exist as a specialist

05:51

or rather the key job or responsibility of the specialist

05:55

is to provide liquidity That is you have to buy

05:58

and sell shares too Accommodate hey the market that's your

06:02

job and in volatile markets it means that they might

06:05

run out of inventory or be squeezed and have to

06:08

buy shares at much higher or sell shares at much

06:12

lower prices than their costs But that's the risk you

06:15

take when you become a specialist they must execute on

06:18

these trades and if they don't they lose Their seat

06:21

Is a specialist on the exchange altogether and are more

06:24

or less fully out of work And you know i

06:26

don't know Working for uber lift or something Next Yeah

06:29

And at that point well they might be willing to 00:06:31.755 --> [endTime] take just about anything for a ride