What is Market Maker? Definition of Market Maker, Market Maker Meaning and Concept
A market maker or market maker in English, are entities that can be companies or individuals and that comply with the regulation of the financial market as participants of the same through a contract with the governing company of this, to be able to offer purchase and sale prices continuously. Its main objective is to provide liquidity in the operations carried out in the secondary market.
The market maker acting as stabilizing prices and that should be your role, although in some cases they are looking to take advantage of inefficiencies in the market and generate large profits, which can give the existence of conflicts of interest.
This figure can operate in any kind of financial asset and market such as market fixed income, equities, foreign exchange market, derivatives market, etc. Market makers will have the obligation to offer counterparty to those investors who want to buy, offering short positions and vice versa. To do this, market makers will keep a stock of assets and securities in their portfolio to be able to offer execution of operations if they do not exist at a certain time.
In Spain this figure is regulated by an order of the Ministry of Economy and Finance of February 10, 1999. There are a series of requirements to be a market creator.
Requirements to be a market maker
To be a market maker in Spain, the following requirements are required:
- Be the owner of a securities account in your own name in the market you want to operate.
- Comply with the requirements established in terms of the provision of technical and human resources, as well as satisfy the other economic and legal conditions necessary to be considered members with full powers in, at least, one of the regulated markets or multilateral systems of negotiation determined by the General Directorate of the Treasury and Financial Policy and the National Securities Commission (CNMV), mainly.
- A sufficient number of market makers should commit to listing and trading securities on those regulated markets or multilateral trading systems, in such a way as to promote liquidity in the market.
- To access the status of market maker, interested entities must send a request to the General Directorate of the Treasury and Financial Policy and the CNMV, in which they will express their intention.
- The General Directorate of the Treasury and Financial Policy, following a report from the Bank of Spain, taking into account compliance with the requirements set out in previous points, may grant the status of creator, provided that the experience of the entity of the financial instruments in which intends to be a member is considered sufficient and it is guaranteed that the clearing and settlement of its operations is carried out safely and efficiently.
There are many market makers that act as brokers, having to comply with regulatory standards in the country in which they are established.
In Spain, the body that establishes these regulations is the National Securities Market Commission (CNMV). But many of the brokers are established in the US or England, where the regulatory bodies are the National Futures Association -NFA-, Commodity Futures Trading Commission -CFTC- (in the US) and the Financial Services Authority -FSA- (in England ). There are criticisms of the brokerage market make r models, because they have money desks and base their models on double accounting, also called hybrid accounting, with accounts A and B, where in some cases they launch their clients' orders to the market, but not in others, and what they do is cover themselves, with possible conflicts of interest.
In this area, it is very important to choose the right type of broker and see its financial health, by checking its commercial register and the endowment of its own resources or coverage that it may have in the event of insolvency. A company that registers with 3,000 euros will not be the same as another that has a guarantee of its own resources of 3,000,000 euros.