Market making: Market maker is a brokerage company or an organization that engages in trading of rarely traded securities to instill their liquidity. A market maker’s task is to improve the need and supply scenarios of specific securities that are not often traded. These include shares, futures and choices. Since their primary role is to make a market for the securities by purchasing and offering, they are rightly called as market makers.
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Function of market maker in the securities market:
In case of the securities that are not traded frequently, investors in the market do not reveal any interest in engaging with these shares because of the worry of illiquidity. In such situations, market makers would work in their usual method by putting their bid-ask quote (Rs 1050– Rs 1000) which basically means that they are all set to sell the security priced quote at a price of Rs 1000 and to purchase the security at Rs1050 Principle of market making objectives at improving the liquidity of less-liquid securities, being a system of synthetic demand supply production it constantly draws criticism.
Threat that is undertaken by market makers:
The primary danger that a market maker undertakes is the possibility of decrease in the value of the securities they bought. The bid-ask spread on the big volume of transactions market makers engage in would make sure that earnings are made.
Responsibilities of market maker:
And the Market Maker ought to notify the exchange in advance for each and every black out period (staying 25% of the time in a day) during which the quotes are not used by the Market Maker.
Merits of market making:
1. Discovery of much better cost:
The optimal number of market makers that are designated for a security is 5. This guarantees that the Market Makers contend with each other for using better quotes to the investor.
2. Source of trustworthy details:
Market makers will also participate in keeping an eye on the securities trading and report anomalies to the Exchange for suitable intervention. This would facilitate more credible details to the investors.
3. Assured Minimum liquidity:
Market makers would ensure the in-frequently traded securities of minimum surefire liquidity as they ought to constantly be prepared to buy/sell the very same.
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