Market maker – Job Description
This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the job description of a Market Maker.
A market maker is a market participant in the financial markets that simultaneously buys and sells quantities of any particular asset by posting limit orders. The market maker posts limit orders in the market and profits from the bid-ask spread, which is the difference by which the ask price exceeds the bid price. They can exist in all the different markets (including foreign currency, bonds, equity etc.), but generally markets maker play a significant role in the equity markets. Due to the high quantity of securities needed to ensure the required volume of trading and huge capital, market makers are generally large institutions like investment banks and asset management firms.
A market maker plays a significant role in the financial markets throughout the world. They benefit in the financial markets by maintaining a sizable bid-ask spread for every security they trade in. By holding a large number of shares, a market maker is able to provide liquidity to the market for an asset. If investors or traders are selling in a market with low trading volumes, market makers buy the assets to provide liquidity, and vice versa. Market makers help in maintaining a balance between the demand and supply of an asset in the market. Their role includes taking a position in the opposite side of whatever direction the market is moving in at any given point in time.
Thus, with this strategy, they are able to fulfill the market demand for a stock and facilitate its circulation. Market makers help the financial markets and its participants to buy or sell shares easily by providing them with liquidity.
Two types of market makers:
- Activity for a bank (proprietary trading) The bank thinks that is a profitable activity
- Contract for a firm to provide liquidity for the market of the stocks issued by the firm. A service provided for firms
Duties of a market maker (for a firm)
- Providing liquidity by being present on the buy and sell sides of the market (by posting limit orders)
- Matching orders in the order book
- Providing depth to the asset’s market
Risks of the activity of market making
Market makers have to undertake high risks while executing trades in the market as the market can move in the opposite direction of their positions in no time. If a seller is willing to sell shares of a company by sending a sell market order, the market maker is be ready to buy by posting buy limit orders to provide liquidity to the market. However, if the number of sellers keep on increasing in the market, the share price will eventually go down against the market maker’s position. This can lead to huge losses for the market makers, increasing the associated risks of this activity.
Who does a market maker work with?
A market maker works in collaboration with different teams and individuals who are responsible for providing him with the right knowledge and inputs.
Normally, a market maker works with:
- Brokerage firms – Market makers work with the brokerage firms who help them in executing orders in the
- Research Teams – They also work in collaboration with the research teams who are responsible for
providing them with financial and non-financial information about different assets.
- Sector Specialists – They help market makers in gathering information about different sectors and
How much does a market maker earn?
The remuneration of a market maker largely depends on the type of organisation and sector he or she works in. The practical experience in financial markets is a major deciding factor while calculating the remuneration of a market maker. As of the writing of this post, an entry level market maker can earn between $35,000-$45,000 per annum in the initial years.
A market maker is also entitled to bonuses and extra benefits depending on the organisation he or she works at and the profits he or she generates.
What training do you need to become a market maker? ?
To become a market maker, an individual is required to have at least a bachelor’s degree with a specialization in finance. He or she is expected to have the basic understanding of financial markets and different financial instruments. Also, good level of interpersonal skills is required to communicate with different stakeholders on a daily basis.
In France, a Grand Ecole diploma with a specialization in market finance is highly recommended for an individual to get a good entry level position in a reputed bank or asset management firm.
Different trading qualification exams like AMF examination is also recommended to understand the French financial markets in a more practical sense and enter the market with sufficient knowledge.
Link with the SimTrade Certificate
The concepts about market making can be learnt in the SimTrade Certificate:
- By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
- By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.
- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
- By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.
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Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022).