How to Become a Market Maker

How to Become a Market Maker

So you want to become a market maker? Is it really worth it? Why don’t you just trade stocks in your own account for a living? That will at least give you more freedom and autonomy. But if you must know how to become a market maker, well let’s see if I can help you out.

What is a market maker?

Market maker refers to individuals or firms that actively quote two-sided markets by supplying bids and offers for a specific security. Essentially, a market maker is a wholesale purchaser of investments such as stocks or securities.

Market makers are often brokerage firms or banks due to the high capital volume necessary to be considered a market maker. The goal of a market maker is not only to achieve a profit but maintain liquidity in financial markets.

What does a market maker do?

Market makers purchase shares in large volume and then quote a buying and selling point for potential outside buyers.

As soon as an order is placed for a specific number of shares, the market maker sells the shares from their inventory for a slightly higher price than they paid to maintain profitability.

This identifies the avenue of profit for a market maker; they purchase shares for a specific price and quote the selling price slightly higher than what they paid.

For example, a market maker may purchase 50 dollars’ worth of Amazon stock. They would then quote these shares for sale at a price of 50.10 dollars. Following the transaction, they will receive a profit of .10 dollars.

Small profits on many transactions in a busy, high-traffic market will lead to large daily profits at high volume.

Market makers earn profit by being compensated for the risk of holding specific securities in high volume. An essential aspect of profit margin for firms or individuals operating as a market maker is the bid-ask spread.

The bid-ask spread is the difference between the bid made, the price paid for an investment, and the ask, or the price at which the market maker is willing to sell inventory.

Market makers must constantly update their bid-ask spread to maintain the best price to buy and sell securities. Market makers help limit price variation in markets by limiting the trading price for particular shares of specific investments.

How do you become a market maker?

The industry of being a market maker is a competitive one. Many brokerage houses will compete daily to have the best bid and ask for quotes and work to maintain prices lower than their competition.

Based on the large volume of trading necessary to be considered a market maker, it is unlikely that a market maker will be a single individual. If a single individual operates as a market maker, they are considered a “local.”

To operate as a market maker, brokerage houses must continuously quote prices for bids and asks (buy and sell). They also must continuously quote the volume of sales they intend to complete and the frequency they plan to sell this volume.

Market makers must follow these guidelines at all market outlooks.

Market makers are a crucial player in the stock market as they are large investment firms or institutions that create liquidity within the market.

Source
https://www.investopedia.com/terms/m/marketmaker.asp

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