In financial trading of any type, be it spread betting, contracts for difference, share dealing, forex, or any other investment style you can think of, markets tend to be at the heart of what it’s all about. Markets provide the inherent value in assets and allow buyers and sellers to meet, with an elegant reflection of corresponding supply and demand in market prices. In order for a market to function, it needs liquidity – the constant flow of capital through a market that ensures buyers can buy and sellers can sell, and at as close to market price as possible. So what happens in instances where a trader wants to sell and no one wants to buy? After all, who would want to buy up a failing asset anyway?

The answer lies in market makers, and the role these investors play in keeping markets afloat should not be underestimated.

What Is A Market Maker

Market makers are the investment institutions that step in to markets to effectively pick up the slack where liquidity would otherwise run dry. Market makers are not interested in whether a market wins or loses, but are engaged in finding profits in the spread – i.e. the gap between the prices at which they are willing to make a market on both ends. From a market standpoint, this creates the feeling of additional liquidity for traders, and allows capital to move much more freely around global markets.

Market makers tend to be large brokers, investment funds, banks and other organisations, and the service they provide is important in shoring up investment markets. But can we do without market makers and still have free flowing trade, and how core is their role for ordinary investors?

Why They Are Central To Market Function

When a market lacks counterparties to an order, that order cannot be filled unless a market maker is involved. In this sense, market makers provide the shortfall liquidity to leverage returns on the spread in the middle. Because of their importance to the market, this extra liquidity is rewarded directly, in addition to the availability of a profit in the spread portion of each transaction. Such is the necessity of their involvement, traders would find executing their trading orders much more difficult, subjecting their account to more slippage and making the markets less transparent in terms of pricing.

Markets are sophisticated creatures, and in many ways they work fluidly to deliver significant benefits to speculators, buyers and sellers. While high trade volume markets achieve liquidity naturally, the involvement of market makers serves to lubricate the process and ensure traders on all sides of the market can achieved the desired trading end.