Market Makers

Market Makers are financial intermediaries or firms that provide Liquidity in the markets by bEINg ready to buy and sell Securities at any time. They facilitate trading by quoting both buy (bid) and sell (ask) prices for a range of Securities, ensuring that there is always a market for those Securities.

Market makers profit from the spread between the Bid and Ask prices. By maintaining an Inventory of Shares, they can accommodate buy and sell orders from investors. This activity helps to stabilize prices and reduce volatility.

Examples:

• A market maker in a Stock like Apple Inc. may quote a bid price of $150 and an ask price of $150.50. This means they are willing to buy Shares at $150 and sell them at $150.50.
• In the foreign exchange market, a market maker might provide Liquidity for currency pairs such as EUR/USD, offering a bid price of 1.1800 and an ask price of 1.1820.

Cases:

• In a situation where there is high demand for a particular Stock, a market maker may increase the spread to manage the risk of holding too much Inventory.
• During a market downturn, market makers may withdraw from certain Securities to limit their exposure to losses, which can lead to decreased Liquidity and increased volatility.