Market maker
A dealer who stands ready to buy and sell, quoting both prices and taking the other side of trades. It earns the bid–offer spread for holding inventory and its risk; competition among them narrows spreads.
Where you will meet it
Market maker appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set out how ETF shares change hands on the secondary market
“Liquidity therefore comes in two layers: the visible on-screen volume in the ETF, and the liquidity of the underlying basket, which market makers can tap through creations and redemptions by authorised participants.”
- Name the main kinds of electronic trader and set out how they differ
“Electronic dealers, or market makers, post bid and ask quotes and earn the spread.”
- Set out what influences the bid–ask spread on an ETF
“The bid–ask spread on an ETF reflects the cost to a market maker of taking the other side of a trade and laying the risk off.”
- Explain the dangers electronic trading creates and the tools regulators use to contain them
“Regulators and exchanges respond with pre-trade risk controls such as order-size and price limits, kill switches, trading halts and circuit breakers, limit-up/limit-down bands, rules for cancelling clearly erroneous trades, minimum quote obligations for market makers and surveillance of order-to-trade ratios.”
Practise it
Practise market maker until it is automatic: questions that explain every wrong option.
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