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Market markers1

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Encyclopedia of Finance

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Abstract

The primary focus of this entry is on market maker services, revenues, and costs. A market maker’s basic function is to service the public’s demand to trade with immediacy by continuously standing ready to buy shares from customers who wish to sell, and to sell shares to customers who wish to buy. Additionally, the market maker helps to stabilize prices and to facilitate a reasonably accurate price discovery. Further, a special type of market maker — a stock exchange specialist — fulfills the role of an auctioneer. The bid—ask spread is the classic source of market maker profits, while the costs of market maker operations include: order-processing, risk-bearing (the cost of carrying an unbalanced portfolio), and adverse selection (the cost of trading with a better-informed participant). The paper further considers the competitive environment that market makers operate within, and concludes with the thought that institutionalization, the advent of electronic trading, dereg ulation, and globalization of the equity markets have led to major changes in market maker operations in the recent past, and will continue to do so in the coming years.

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References

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Author information

Authors and Affiliations

  1. City University of New York, New York, USA

    Robert A. Schwartz & Lin Peng

Authors
  1. Robert A. Schwartz
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  2. Lin Peng
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Editor information

Editors and Affiliations

  1. Rutgers University, New Brunswick/Piscataway, USA

    Cheng-Few Lee

  2. San Francisco State University, San Francisco, USA

    Alice C. Lee

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© 2006 Springer Science+Business Media, Inc.

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Schwartz, R.A., Peng, L. (2006). Market markers1 . In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-26336-6_63

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  • DOI: https://doi.org/10.1007/978-0-387-26336-6_63

  • Publisher Name: Springer, Boston, MA

  • Print ISBN: 978-0-387-26284-0

  • Online ISBN: 978-0-387-26336-6

  • eBook Packages: Business and Economics

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