Shares question - "market makers"
Discussion
I like to think I know a thing or 2 about shares but there is something I can't get my head around. I know there are marker makers who effectively control the bid/offer spread but my questions are:
Who are they? There is clearly an element of profit involved because of the spread so how does one qualify for this?
Why are they needed? Surely in a perfect market someone asks for shares at a price and that is then matched, and vice versa. If no shares are for sale then a buyer has to up his price limit. If there are no buyers then the price is dropped yada yada
I've had a look around google but explanations tend to focus on the bid/offer element. Thanks in advance
Who are they? There is clearly an element of profit involved because of the spread so how does one qualify for this?
Why are they needed? Surely in a perfect market someone asks for shares at a price and that is then matched, and vice versa. If no shares are for sale then a buyer has to up his price limit. If there are no buyers then the price is dropped yada yada
I've had a look around google but explanations tend to focus on the bid/offer element. Thanks in advance
As i understand it.. and bear with me because i'm drunk, large holdings of shares are put on the open market, but many brokers want to buy and sell small holdings of these shares, too small to put on the open market, so the market makers buy and sell these shares off the small shareholders, making sales quick and easy for the brokers.
um.. i think.
um.. i think.
Dont take this as being 100% correct, but from what I remember of my regulations exams. On the FTSE 100 there are no market makers simply because there is enough liquidity and no need for them.
It is on the smaller shares in which liquidity is more of an issue.
To qualify you need to ask to be accepted. However I dont think the profit is in anyway guarenteed. If you read what they need to do it could probably become quite risky. I imagine to do it effectively you would need to have a holding in the underlying shares to start with. Then you need to present in the market for something in the region of 90% of the day keeping a certain maximum spread.
I also thought this sounded like a great idea and fantastic money making scheme....
But think again. The shares in which the spreads are biggest are the ones which trade the least.
The ones which trade more = spread smaller...
I came to the conclusion that to cover all the costs, this would need to be a side of another bussiness in which most of the back office costs and such like were already required and therefore absorbed. Or distributed throughout the different divisions.
It is on the smaller shares in which liquidity is more of an issue.
To qualify you need to ask to be accepted. However I dont think the profit is in anyway guarenteed. If you read what they need to do it could probably become quite risky. I imagine to do it effectively you would need to have a holding in the underlying shares to start with. Then you need to present in the market for something in the region of 90% of the day keeping a certain maximum spread.
I also thought this sounded like a great idea and fantastic money making scheme....
But think again. The shares in which the spreads are biggest are the ones which trade the least.
The ones which trade more = spread smaller...
I came to the conclusion that to cover all the costs, this would need to be a side of another bussiness in which most of the back office costs and such like were already required and therefore absorbed. Or distributed throughout the different divisions.
jsc15 said:
I like to think I know a thing or 2 about shares but there is something I can't get my head around. I know there are marker makers who effectively control the bid/offer spread but my questions are:
Who are they? There is clearly an element of profit involved because of the spread so how does one qualify for this?
Why are they needed? Surely in a perfect market someone asks for shares at a price and that is then matched, and vice versa. If no shares are for sale then a buyer has to up his price limit. If there are no buyers then the price is dropped yada yada
I've had a look around google but explanations tend to focus on the bid/offer element. Thanks in advance
It's a liquidity issue.Who are they? There is clearly an element of profit involved because of the spread so how does one qualify for this?
Why are they needed? Surely in a perfect market someone asks for shares at a price and that is then matched, and vice versa. If no shares are for sale then a buyer has to up his price limit. If there are no buyers then the price is dropped yada yada
I've had a look around google but explanations tend to focus on the bid/offer element. Thanks in advance
SETS stocks have sufficient 2way flow so as to not need anyone to assist in making a market.
The smaller, or less liquid stocks don't and so a MM is essential.
If you look to some of the matched bargain exchanges like the old OFEX they were fundamentally dead as the only liquidity came from the occasional seller and the occasional buyer.
The basic job of an MM is to take the buy or the sell onto their own book (if in resonable size or market conditions) and if necassary, sit on it until the oposing order came in. To achieve this they would move their bid/ask around to encourage either buyers or sellers away from the other MMs.
For doing this they take a fee, both in the spread and where possible on the book as well.
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