Page 4 - MEX Express - Vol 6 Issue 4

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Buyers
Sellers
In simple language, a market maker is a
person or brokerage house that is always
prepared to buy and sell securities in order
to provide liquidity to the markets. In other
word, market maker is an intermediary that is
willing and ready to buy and sell securities for
a profitable price of instruments listed in the
exchange. Market Maker is also a brokerage
house or bank that maintains a firm bid and
ask price in a given security by standing ready,
willing, and able to buy or sell at publicly
quoted prices (called making a market).
These firms display bid and offer prices for
specific number of specific securities, with the
reference to External Price Link (EPL) and if
these prices are met, they will immediately buy
for or sell from their own accounts. A market
maker makes a profit by attempting to sell high
and buy low. Generally, market makers do not
seek to establish directional positions in the
market. Instead, market makers are willing to
buy or sell an asset, striving to make a profit
by collecting some fraction of the difference
between its offers to buy and to sell. Market
makers establish quotes where the bid price is
set slightly lower than listed prices and the ask satisfy a high volume of market orders in a matter from XYZ Company, creating a rush to sell
price is set slightly higher in order to earn a
small margin.
The price quoting system in the market making
is as follows:
• With the reference to External Price Link
(EPL), MM quotes the Bid and Ask price.
Here Bid Price is selling price and ask is a
Editorial Board: Mr. Lakshman Pandit / Mrs. Liberty Shakya / Ms. Shubhechchha Mulepati
Mercantile Exchange Nepal Limited, Alliance Tower, 4th Floor, Charkhal, Dillibazaar, Kathmandu, Nepal
Phone: +977-1-4011542/43/44, Fax: +977-1-4011545/6 | e-mail: editor@mexnepal.com
MARKET PERSPECTIVE
Role of Market Maker in
Commodity Market
Market
Market Maker
Profit
buying price for investor.
• The spread range is depending on the nature
of product and quantity chooses of the
product by the investor.
• If a MM chooses spread 1 the 1 tick is
deducted and added to EPL Bid and Ask
price respectively. i.e. if the product is gold their brokerage sales operations.
then 2.5 is added to Ask price and deducted
to Bid price.
• Priority is depending on the quote with least
spread and if the quote has same spread then
it will depend on time.
Market-makers serve a crucial role in financial
markets by providing liquidity to facilitate
market efficiency and functioning. Post crisis,
several developments suggest that the behavior
of these liquidity providers may change. Such
changes and their potential impact on fixed
income markets are of particular interest to
policymakers, given the relevance of these
markets to monetary policy and financial
stability.
By holding a disproportionately large number
of a given security, a market maker is able to
of seconds at competitive prices. If investors
are selling, market makers are supposed to keep
buying, and vice versa. They are supposed to
take the opposite side of whatever trades are
being conducted at any given point in time. In
this sense, market makers are able to satisfy the
market demand for a security and facilitate its
circulation. Market makers assume a high level
of risk because of the high number of units
they hold (their inventory). Market makers are
entrusted with promoting market efficiency by
keeping markets liquid. To ensure impartiality
for the benefit of their clients, brokerage houses “market”. When a stock or option or commodity
who act as market makers are legally required
to separate their market making activities from
Then what will happen if there are no Market
Makers in Derivative Market.
Market makers have given option traders quite
a negative impression as people who buy at
very low prices and sells at very high prices
just when an option trader is desperate to buy or
sell a position. Let’s see what happens when we
remove market makers from the markets.
XYZ stock is an extremely bullish stock who
has just announced fantastic earnings. You
want to buy XYZ stocks but investors who are
already holding XYZ stocks are not selling. In
order to attract a seller, you begin to bid higher market price is lower than the prevailing price,
and higher for XYZ stock until at last, a seller
is moved to selling the stock. This price could
already be extremely high.
Consider again a sudden bad news released
XYZ stocks. You are queuing to sell but nobody
is buying. In order to attract a buyer, you start
to push the price lower and lower until at last,
the price bottoms out worthless.
As we have seen, in an imbalanced buying
and selling situation, market makers play an
extremely important role of creating liquidity
Volume: 6 • Issue: 4 • Year: 2014 A.D
Sellers
Buyers
for prices in between in order to eradicate
huge gap ups and downs and to ensure a liquid
market for all.
In reality, Market Makers make up the actual
trader places an order with a broker, that broker
fills that order by buying or selling with the
Market Makers. A Market Maker supplies
a bid and ask price and then let the public
decide whether to buy or sell at those prices.
As an options trader, Market Makers are master
position traders who aim to establish and profit
from every low risk and risk free opportunities.
However, when a Market Maker is not confident
that a stock or option or commodity can be so
quickly bought and sold, due to the fact that
there are only very few option traders or stock
traders trading that security, then there is a risk
that a stock or commodity or option which that
Market Maker buys can only be sold when the
therefore resulting in a loss. In order to protect
against such a risk, Market Makers, widen the
bid-ask spread so that the transaction remains
risk free to him over a larger price range.
Sunita Shrestha
Master of BusinessAdministration
SIAM College
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