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Market Makers

In: Encyclopedia of Finance

Author

Listed:
  • Robert A. Schwartz

    (Baruch College of the City University of New York
    Zicklin School of Business, Baruch College, CUNY)

  • Lin Peng

    (Zicklin School of Business, Baruch College, CUNY)

Abstract

The primary focus of this chapter is on market maker services, revenues, and costs. A market maker’s basic function is to service the public’s demand to trade with immediacy by continuously standing ready to buy shares from customers who wish to sell, and to sell shares to customers who wish to buy. Additionally, the market maker helps to stabilize prices and to facilitate reasonably accurate price discovery. Further, a special type of market maker, a stock exchange market maker, fulfills the role of an auctioneer. The bid-ask spread is the classic source of market maker profits, while the costs of market maker operations include: order processing, risk bearing (the cost of carrying an unbalanced portfolio), and adverse selection (the cost of trading with a better informed participant). The entry further considers the competitive environment that market makers operate within, and concludes with the thought that institutionalization, the advent of electronic trading, and globalization of the equity markets have led to major changes in market maker operations in the recent past, and will continue to do so in the coming years.

Suggested Citation

  • Robert A. Schwartz & Lin Peng, 2022. "Market Makers," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 38, pages 1007-1010, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_38
    DOI: 10.1007/978-3-030-91231-4_38
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