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I often here the term "market maker" and despite googling it, I still don't understand it. What does a market maker do? I understand that firms like investment bankers are market makers and it seems that many prop firms are market makers. What does it mean? Please help!
Thank you
Can you help answer these questions from other members on NexusFi?
On an exchange, your orders are matched against other people trading, and the price moves up or down based upon an imbalance of those orders. The exchange makes money on the spread and fees they charge, they don't make any money on the change in price.
In theory, a market maker performs the same function as an exchange, but the reality is that oversight in this area is somewhat lacking so they are notorious for manipulating prices and playing games to make additional profit. If you are going to trade with one, you really need to do your homework and find one with a good reputation, not just a good website.
I am confused, markets dont need market makers if there is already an exchange where you can freely bid and offer. Then its a matter of just hitting the bids and offers or placing them yourself. SO what does a market maker do because he isnt matching up orders?
Understanding yourself is just as important as understanding markets.
Many companies who pretend to be "brokers" of various kinds are in fact market makers: they don't execute their clients' orders in the direct market on their behalf, but make their own market, i.e. trade against their own clients by holding the other side of their positions, effectively becoming market makers in the process. ("Retail bucketshops" is another name for them.)
