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Finance: What is a market maker? 4 Views
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Description:
What is a market maker? A market maker is an institutional member of an exchange that displays public willingness to trade by listing bids and offers. As exchange members, they are subject to the rules of and oversight by that exchange’s regulatory body. Without market makers, exchanges would be unable to provide liquidity in the markets.
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Transcript
- 00:00
Finance allah shmoop What is a market maker What is
- 00:07
a market maker Hint He comes right after the butcher
- 00:11
and the baker Okay so you have lots of buyers
- 00:14
and lots of sellers and they come together a g
- 00:17
rated lee in a market which is so big it
Full Transcript
- 00:19
has to be divided into segments or sections or sub
- 00:22
groupings of aa few stocks or bonds in which the
- 00:25
specialist trades and that specialist volunteers there time because they
- 00:30
loved it well actually know that not all true they
- 00:32
get paid a lot Ah lot When things go well
- 00:35
how are they paid Well through spread and not the
- 00:38
warm butter kind Instead spread refers to the money value
- 00:42
between a bid and an ask price under a market
- 00:44
maker structure of trading securities No more wire hangers a
- 00:52
plastic hanger company is publicly traded on an exchange like
- 00:56
nasdaq where buyers bid for a price to purchase and
- 01:00
sellers asked for a price to trade no more Wire
- 01:04
hangers is bid this moment at thirty seven twenty three
- 01:07
a share by buyers willing to pay by right now
- 01:10
at that price and is being asked at this moment
- 01:14
at a price of thirty seven thirty one Note the
- 01:16
eight cents a share difference in the share prices that
- 01:19
def is the spread between the two prices and it's
- 01:23
worth noting that in extremely volatile stocks the spread widens
- 01:28
and in boring highly liquid stocks which don't move much
- 01:32
the spread titans or is narrower that is on a
- 01:36
volatile equivalent of no more wire hangers The spread might
- 01:39
grow to twenty or thirty cents a share whereas a
- 01:42
boring name that pays a big dividend and the stock
- 01:45
never moves much We're thinking t here well that spread
- 01:48
might be just three or four cents So why grow
- 01:51
Well Because a market maker in a volatile stock doesn't
- 01:54
want to be caught losing money on her inventory The
- 01:58
market maker never once to be punished for providing liquidity
- 02:02
and market makers provide liquidity for stocks bonds and well
- 02:05
basically anything else they think they can generate revenue from
- 02:08
spreads in If no more wire hangers suddenly gap down
- 02:12
to thirty seven Ten a share Well it would be
- 02:14
likely less than the average of what the market maker
- 02:18
pa paid for her quote inventory unquote in that stock
- 02:21
from which he was making a market in it Each
- 02:24
time the shares trade the market makers dip into that
- 02:26
spread to pay their bills and allow them to keep
- 02:29
doing business So that spread and it's not the type
- 02:32
that prince used teo sing about Okay so then specifically
- 02:36
what's a specialist i wouldn't have a movie Stallone wait
- 02:41
different kind of specialist in finance land a specialist is
- 02:46
the gala guy trading in a given stock that is
- 02:49
there a member of a stock exchange and they might
- 02:51
carry inventory of satan Ten million shares of microsoft trading
- 02:55
currently at around forty bucks a share Their offering msft
- 02:59
for sale it forty point oh five and they're our
- 03:02
buyer of msft this moment at thirty nine ninety one
- 03:06
and see there's a fourteen cents a share spread their
- 03:09
meaning that they make fourteen cents every time they transact
- 03:13
So let's say that specialist sells a million shares of
- 03:18
microsoft today earning a fourteen cents spread per share while
- 03:22
fourteen cents times a million one hundred forty grand and
- 03:26
clown Nice a day for one day's work so that's
- 03:29
a pretty widespread in the scheme of things because often
- 03:31
brokers have to tack on their own commission of a
- 03:34
few cents on either side and the specialist might in
- 03:37
fact be dealing from their inventory to brokers on both
- 03:41
sides of a transaction in which case they're spread I
- 03:45
even spread to the actual specialist might be just a
- 03:48
few cents times those million shares like four cents times
- 03:51
a million gets forty grand something like that It's still
- 03:53
a really good living But if it's so good then
- 03:56
why don't millions of people fight for that job Like
- 03:59
how hard it is Is it tio Just nod your
- 04:02
head and right down buy or sell and then a
- 04:05
number You think everyone who flips burgers at mcdonald's and
- 04:08
is afraid of robots taking their jobs would be killing
- 04:11
for this gig Well in order to be a specialist
- 04:13
Not only do you need you know special education and
- 04:17
a few siri's license exams but you also need capital
- 04:22
with which to buy inventory risky inventory which you'll hold
- 04:26
as if they are casino chips and you are more
- 04:29
or less the house So when the microsoft shares example
- 04:32
just to be a specialist in that one stock well
- 04:35
you have to raise something like one hundred million dollars
- 04:38
because you'll have to go into the market to start
- 04:41
and simply by you two or three and call two
- 04:43
and a half million shares at around forty bucks each
- 04:46
for a total cost of ahhh ondo or a silicon
- 04:49
valley unit That's What units called out here And yes
- 04:52
that's an investment in the stock could go up but
- 04:54
it could go down as well leaving you holding a
- 04:57
big fat smoldering bag of dog crap dot on and
- 05:01
also going whoever your investors or creditors workout one hundred
- 05:05
million dollars Like if microsoft has kind of evaporated you
- 05:10
know what could happen More risks will haunt your sleep
- 05:12
in that the stock and suddenly gap down three dollars
- 05:15
on a bad quarter at which point Your spreads must
- 05:18
widen to accommodate expected further volatility in the stock And
- 05:22
you then compete with other specialists who also make a
- 05:25
market in microsoft Well at any given time they may
- 05:28
want to go get out of trading in it and
- 05:30
undercut you Buy any or to a share leaving you
- 05:33
as the sole big owner of what will feel like
- 05:37
a stock version of the titanic Well the math gets
- 05:39
complex is the market gets volatile specialists use hedges and
- 05:43
human beings end up competing against a i'd driven black
- 05:47
box computers But the reason you exist as a specialist
- 05:51
or rather the key job or responsibility of the specialist
- 05:55
is to provide liquidity That is you have to buy
- 05:58
and sell shares too Accommodate hey the market that's your
- 06:02
job and in volatile markets it means that they might
- 06:05
run out of inventory or be squeezed and have to
- 06:08
buy shares at much higher or sell shares at much
- 06:12
lower prices than their costs But that's the risk you
- 06:15
take when you become a specialist they must execute on
- 06:18
these trades and if they don't they lose Their seat
- 06:21
Is a specialist on the exchange altogether and are more
- 06:24
or less fully out of work And you know i
- 06:26
don't know Working for uber lift or something Next Yeah
- 06:29
And at that point well they might be willing to 00:06:31.755 --> [endTime] take just about anything for a ride
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