Traditionally, there are two parties for each transaction. The buyer and the seller. The same principle applies to the stock exchange at all times. As an example exchange exchange … Here one places articles into the net and waits until a prospective customer buys the product. Afterwards the transaction and the delivery takes place. At the stock exchange this takes place partially still. In the case of illiquid second-line stocks or over-the-counter listed shares or other financial products. Every seller or buyer has to wait until a suitable partner has been found. This model is unsuitable for many financial products on the stock exchange and is often disadvantageous, as one often cannot or does not want to wait until a suitable partner has been found.
This is where the market maker comes in. He guarantees the trader or investor to take over the counterparty, i.e. to act as buyer or seller.
But what exactly is the market maker? The market maker acts as an intermediary between the exchange and the trader. Ideally, he should be a neutral authority that sets the positions against each other for all traders and investors. It ensures constant liquidity and thus guarantees the execution of client orders.
The tasks of the Market Maker are:
- Ensure the liquidity of the markets/financial products offered so that a sell or buy order can be triggered at any time.
- An orderly price position with minor deviations from the reference exchange/underlying
- A hedge for the remaining open positions so that no compliance problems could arise. (Read more below)
- Fair and transparent cost structure.
These points will be discussed in more detail in the following section.
The advantages of the Market Maker concept.
The advantages of a market maker are especially interesting for smaller accounts and private investors. The Market Maker offers:
- A continuous price position during trading hours and thus enables quick entry or exit.
- Fixed spreads are often guaranteed. This means that no extensions can be forwarded to the customer, even in volatile times.
- Additional offers: CFD brokers who are market makers often offer fractions of a futures contract. If you want to trade directly on EUREX options or futures without a middleman, for example, you have higher margin requirements. Market makers often offer trading with fractions and you can already trade the DAX with a 100€ account. This would be impossible with futures, as you should usually start with a 5 digit account.
The disadvantages of the Market Maker concept.
Everyone should be aware of the disadvantages of a market maker, but they are usually only interesting for advanced traders. The disadvantages are:
- An average slightly more expensive cost structure than without a market maker. Spreads can be considerably smaller, but unfortunately are often not possible for private customers to trade directly on the stock exchange.
- A market maker who is not properly regulated, for example in crypto markets, can often play tricks on customers and disadvantage them. The market maker is responsible for the price position and this can, of course, be negatively influenced by artificial spread widening or poor price execution/price positions. Since CFD brokers are usually always subject to a regulated authority, this would often not apply here, but one should always question strange events.
What's our stance on Market Makers?
Traders shouldn’t blindly trust any third party but for certain situations it will be benefical to work together with a market maker. Brokers listed on BrokerCheck are all regulated by EU authorities and thus customers are protected by EU consumer laws. Most brokers would not risk to get their license reworked by unlawful practices, so traders can safely cooperate with market makers.