Market makers are often perceived as hidden players in the financial market. But who are they really and what functions do they perform on the exchange? Answers to these questions can be found in this article.
Market makers play a key role in ensuring liquidity in financial markets, guaranteeing that investors can buy or sell assets at market prices and in the required volume at any time.
Definition of market makers and their tasks on the exchange
The term "market maker" comes from the English word meaning "creator of the market." According to Russian legislation (Federal Law No. 325-FZ of 21.11.2011), a market maker is a trading participant who signs an agreement with the trading organizer and undertakes to maintain liquidity in the market for specific assets such as stocks, bonds, currencies, and commodities.
Market makers offer two-sided quotes (buy and sell prices) for assets and maintain specific trading conditions, including minimum and maximum spreads, as well as order volumes. They often represent large financial organizations such as banks, brokers, or investment companies that buy assets on their own accounts and provide quotes for buying and selling.
Exchange quotes are formed based on the balance of supply and demand. Complete data on orders is available exclusively to market makers, while retail investors can see only limited information in the so-called order book. Using this data, the market maker sets market prices and maintains their stability by constantly updating quotes and making trades at the quoted prices.
Main functions of market makers
The main goal of market makers is to maintain liquidity in the markets. For example, if an investor decides to buy 100 shares of Gazprom but cannot find a seller, the market maker will provide the necessary number of shares at the market price, which helps avoid long waits and minimizes market volatility. As a result, the transaction will take place almost instantly, and the price of the security will remain stable.
The market maker regulates the balance of supply and demand: if the market experiences excess demand, it sells assets from its own account; in case of excess supply, it buys them. This helps smooth out sharp price fluctuations.
When the market is in a balanced state, the market maker may not intervene in trading. However, when a demand and supply imbalance occurs, its role becomes more active.
Market makers' income and their obligations
Market makers profit from the difference between buying and selling prices (the spread) and may also earn on exchange commissions. Their activities are regulated by Russian legislation and monitored by the Bank of Russia and the exchange itself.
If a market maker violates trading rules or manipulates the market, the exchange may take action, including warnings, fines, or temporary disconnection from trading. In case of serious violations, the Bank of Russia may revoke the market maker's license.
Result
Market makers play an important role in ensuring liquidity in financial markets by supporting prices and trading volumes for specific assets. Their activities are regulated by Russian laws, and compliance is monitored by both the exchange and the Bank of Russia.
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