Powering Competitive Markets
Market makers compete with other market participants to execute trades. This intense competition requires continuous innovation, powerful predictive analytics and robust systems—which drive better outcomes for investors.
The Business of Market Making
Market makers provide a ‘two-way quote’ to the market, which means they are willing to both buy and sell a security at a competitive price in all market conditions.
By taking the market risk to trade in this fashion, market makers can earn a ‘spread’ between the bid (what someone is willing to pay for a security) and the ask (what someone is willing to sell it for). This is known as the bid-ask spread.
In today’s highly competitive and efficient markets, the bid-ask spread is often much less than one percent of the price of a security. To generate revenue, a market maker must accurately price securities almost instantaneously and execute trades at significant scale.
We also need to carefully manage our risk and anticipate how market dynamics might change over time.
Values, Risk and Regulation
Market making is a highly regulated business. We are registered with the CBI, CFTC, FINRA, HK SFC, IIROC, OSC, SEC and UK FCA.
We work closely with regulators in all of the markets in which we operate to understand their priorities and lend our knowledge and expertise.
We seek to be a force for positive change in market structure globally, strengthening investor confidence in market integrity and access to financial opportunity.
Sure, let's break down the concepts mentioned in the article on "Powering Competitive Markets" and relate them to the field of market making.
Continuous Innovation and Predictive Analytics: Market making involves a constant quest for innovation in trading strategies and technologies. This includes the use of predictive analytics—employing algorithms and statistical models—to forecast market movements and price securities accurately. Advanced data analysis helps market makers anticipate market dynamics, enabling quick decision-making in volatile conditions.
Two-Way Quote and Bid-Ask Spread: Market makers offer a two-way quote by providing both buying and selling prices for a security. The bid represents the price a buyer is willing to pay, while the ask is the price at which a seller is willing to sell. The difference between these prices is the bid-ask spread, which is the profit margin for market makers. In highly competitive markets, this spread is usually narrow, often less than one percent of the security's price.
Risk Management: Market making involves assuming market risk to facilitate trades. Effective risk management strategies are essential to mitigate potential losses. Market makers must anticipate and adapt to changes in market conditions, employing risk assessment models and hedging techniques to manage their exposure.
Regulation and Compliance: Market making is a tightly regulated business, as highlighted by the various regulatory bodies mentioned in the article—such as the CBI, CFTC, FINRA, and others. Compliance with regulations ensures transparency, market integrity, and fair practices. Market makers collaborate with regulators to stay updated on evolving regulations and contribute to improving market structures while fostering investor confidence.
Global Market Operations: Market makers operate in various global markets, necessitating compliance with different regulatory frameworks and adapting to diverse market structures. Understanding the priorities and nuances of each market is crucial for effective market making operations.
By demonstrating expertise in these areas—such as understanding the nuances of bid-ask spreads, regulatory compliance, risk management, and the use of predictive analytics—market makers can navigate the complexities of competitive markets while contributing to market integrity and efficiency.
