Question

Explain the functions of market makers in public offer of shares

Answer 1

With these transactions, commonly known as "principal trades" market makers can enter and adjust quotes to buy, sell, execute and clear orders.

Market makers must operate under a given exchange's bylaws, which are approved by a country's securities regulator, such as the Securities and Exchange Commission in the U.S. Market makers' rights and responsibilities vary by exchange, and by the type of financial instrument they are trading, such as equities or options.

2:02

Role Of A Market Maker

Understanding Market Makers

The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid. A market maker can also be an individual intermediary, but due to the size of securities needed to facilitate the volume of purchases and sales, the vast majority of market makers work on behalf of large institutions.

"Making a market" signals a willingness to buy and sell the securities of a defined set of companies to broker-dealer firms that are member firms of that exchange. Each market maker displays buy and sell quotations for a guaranteed number of shares. Once an order is received from a buyer, the market maker immediately sells off his position of shares from his own inventory, to complete the order. In short, market making facilitates a smoother flow of financial markets by making it easier for investors and traders to buy and sell. Without market making, there may be insufficient transactions and less overall investment activities.

A market maker must commit to continuously quoting prices at which it will buy (or bid for) and sell (or ask for) securities. Market makers must also quote the volume in which they're willing to trade, and the frequency of time it will quote at the Best Bid and Best Offer (BBO) prices. Market makers must stick to these parameters at all times, during all market outlooks. When markets become erratic or volatile, market makers must remain disciplined in order to continue facilitating smooth transactions.

How Market Makers Earn Profits

Market makers are compensated for the risk of holding assets because they may see a decline in the value of a security after it has been purchased from a seller and before it's sold to a buyer.