Market maker question

Discussion in 'Trading' started by Highterm, Oct 19, 2007.

  1. Highterm


    Could someone please explain what a market maker does exactly.

    As i understand, a market maker buys from one trader/ broker and then sells on to another trader, is that correct?

    What i am interested to understand is, how does a market maker control/ hedge the risk of his 'product' falling in price from what he pays to what he can sell at?

  2. In a nutshell, a market maker is someone who trades for their own account. They don't really care to much who they're trading with. They're generally interested in earning their profit from the bid/ask spread, not necessarily speculative price moves. They can control risk via having offsetting positions in related markets, using options and/or futures or merely keeping their position size small relative to what the market depth is.
  3. A market maker is usually obliged to trade (buy to sellers, sell to buyers), so liquidity is enhanced.

    They lower/rise the bid/ask and try to make some -small- amounts of money.

    Most people with ineffective strategies tend to blame the market makers, instead of reviewing their strategies.
    Typical loser behavior.