MARKET MAKING Meaning and
Definition
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Market making is a process carried out by financial institutions or individuals that involves creating liquidity in financial markets by both buying and selling securities. It refers to the practice of continuously quoting bid (buy) and ask (sell) prices in order to facilitate the smooth functioning of the market.
The role of a market maker is to act as a counterparty to both buyers and sellers, providing them with the opportunity to execute their trades efficiently and at a fair price. By continuously providing bid and ask prices, market makers create a ready market for securities, which helps to increase market efficiency and liquidity. They play a crucial role in ensuring that the market remains active and that there is a smooth flow of transactions.
Market makers are typically appointed by stock exchanges and operate in various financial markets, including stocks, bonds, commodities, and foreign exchange. They are often specialized in specific securities or sectors to gain a deeper understanding of the market dynamics and to provide better pricing.
In addition to facilitating trading, market makers also manage risk. They earn profits from the difference between the buying and selling prices, known as the spread, and aim to minimize their exposure to price fluctuations through hedging techniques such as delta neutral trading.
Overall, market making is a vital function in the financial system that helps maintain liquidity, enhances price discovery, and facilitates efficient trading in various financial markets.
Common Misspellings for MARKET MAKING
- narket making
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Etymology of MARKET MAKING
The term "market making" originates from the combination of the words "market" and "making". The word "market" has roots in the Latin word "mercatus", which referred to a place of buying and selling goods. It later evolved into the Old English "mearcett", denoting a marketplace or a meeting place for traders. "Making" comes from the Old English word "macian", meaning to create, produce, or cause. When the two words are combined in the context of finance and trading, "market making" refers to the activity of creating or making a market by buying and selling assets with the goal of facilitating trading and providing liquidity to the market.
