what exactly is a market maker? what do they do? how are they relevant to trade execution? how do they profit?

Question

please tell in as much detail as possible what exactly a market maker is, what he does, where they do what they do, why they're necessary, who they're employed by, what exactly they have to do with executing trades, what specific role they play in a trade, or anything else of relevence. thank you!!!

Answer 1

You don't say "why" you want to know this info, that you could look up anywhere under definitions. If you are thinking of becoming a market maker, that's an entirely different question, and all of your questions are irrelevant until you meet certain requirements.

First, if you want to become a market maker, it requires huge sums of money; more than you can probably dream of. Then, he has to have gobs of financial support and credit lines, and open communications with brokerages, exchanges and other financial institutions. In short, he's an expert with decades of experience, business acquaintences, and alliances.

What he does, is makes a market in a particular security. If the security is a small company, he may have two or three. But for a big company like IBM or Microsoft, their are several Marketmakers just for that one security.

When you want to sell, this is the guy that has to buy, especially if he can't find other buyers, so he has to have tons of funding. He also manages the Book, which shows all pending orders and stops; both sides. In short, he facilitates trade.

Answer 2

They're people who quote bid/ask prices on securities. They help provide liquidity to the exchanges so that others who want to buy and sell have a counterparty. Their profit comes from the bid/ask spread because they buy low and sell high from that spread.

They can be from any of a number of places. The more typical places are big banks, but hedge funds can also act as market makers on some exchanges.