A market maker in financial markets is an individual or institution that quotes both a buy and a sell price in a financial instrument or commodity, with the intention of making a profit on the bid-offer spread, or turn. They essentially create a market for the financial instrument by always standing ready to buy or sell.
Market makers play a critical role in ensuring liquidity in financial markets. Without market makers, there would be fewer transactions and less liquidity, which could lead to larger spreads between the bid and ask prices, resulting in higher costs for traders and investors.
Examples of market makers include large banks and brokerage firms. For instance, in the equities markets, they might buy stocks and hold them in their accounts in anticipation of selling these shares to other traders or investors. In the foreign exchange markets, market makers might take the opposite side of a trader’s transaction to ensure they can execute the trade at the desired price.
In essence, market makers act as wholesalers in the financial markets, buying and selling financial instruments to meet the demand from retail traders and investors. They help to ensure that trading can occur smoothly and efficiently, and they take on a significant amount of risk to provide this service.
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