Market making - Financial definition
Concise definition of the term market making
Market making involves financial firms or individuals providing liquidity to financial markets by continuously quoting buy (bid) and sell (ask) prices for a particular asset, profiting from the spread between these prices.
Comprehensive definition of the term market making
Market makers play a crucial role in financial markets by ensuring there is always a counterparty for trades, thereby enhancing market liquidity and reducing price volatility. They operate across various markets, including stocks, bonds, commodities, and derivatives, and are essential for the smooth functioning of exchanges by facilitating the efficient execution of trades.
For example, in the stock market, a market maker will post bid and ask prices for a given security and adjust these prices based on supply and demand, trading volume, and other market conditions. This activity not only helps in maintaining a balanced and orderly market but also enables investors to execute their trades more easily and with less slippage. Major financial institutions, specialized trading firms, and sometimes individual traders engage in market making, leveraging advanced algorithms and high-frequency trading techniques to manage their positions and mitigate risks.