Overview

market maker


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A trader in a goods or securities market who holds a stock of the good or security and is willing to buy or sell at pre-announced prices. These prices only apply up to some limited quantity, but up to this limit they provide liquidity for other people or firms who want to buy or sell. For larger deals the market-maker will negotiate over price. The market-maker's profits come from the difference between their ask, or selling price, and their bid, or buying price. These prices have to be adjusted over time to keep supply and demand approximately balanced. If demand persistently exceeds supply at the market-maker's offer price, this must rise, otherwise stocks will become exhausted; if supply persistently exceeds demand at the market-maker's bid price, this must fall, otherwise stocks will rise above the level the market-maker is willing and able to finance. The spread between a market-maker's bid and offer prices has to be large enough to cover operating costs and a premium to cover the risks they are taking.

Subjects: Economics.


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