Market maker
Market Maker (also market maker or market maker ), as the financial market - players on financial markets are described which other market participants continuously counterparty are available and allow them to immediately realize transaction interests at a fair market price.
General
Market participants in the capital markets are generally natural persons ( investors , traders ), institutional investors , non-banks , credit institutions , stock market traders or specialists . As a rule, only credit institutions, in particular investment banks and large banks, as well as specialists (for Xetra ) are eligible as market makers. Specialists are also allowed to enter trading themselves in order to provide market liquidity , but are not allowed to influence the stock exchange price , i.e. change the point of the greatest possible turnover. Market making belongs to the category of continuous trading, in which the market maker regularly embodies the opposite side of the market (counterparty) and acts as the determining contracting party.
Market-makers can both trading centers ( exchanges , multilateral trading facilities and organized trading systems ) and outside of trading venues, ie OTC ( English over the counter ) act. At a trading venue, market makers are participants in this trading venue and offer the other participants the opportunity to conclude transactions immediately. The OTC market maker interacts with its customers outside of a trading venue.
Market makers determine the trading volume and the respective prices at which they want to buy ( bid price ) and at which they want to sell ( ask price ). Often, market makers call ("place") the bid and ask prices at the same time. In this case one speaks of quotes ; the market maker takes on the one quote. However, it can also be the case that a market maker only offers to buy or sell at a time. This is particularly possible in an order book as long as a market maker is not obliged to quote to a certain extent.
The market maker enters into an open position for his own account by delivering from his own portfolio and acquiring it for his own portfolio. An essential characteristic is its constant presence during business or stock exchange hours. A market maker is “a trader who is always ready during business hours to either buy certain securities on request at a price specified by him or to sell them at a higher price specified by him, without knowing whether the person making the request want to buy or sell ”.
Although market making and designated sponsoring are often used synonymously, they are similar, but strictly speaking, quite different activities. In contrast to Designated Sponsoring, the securing of liquidity is not carried out on behalf of an issuer, but in order to gain own perks. In the past, stockbrokers who worked as market makers via Eurex for a certain number of securities received the liquidity to z. B. guarantee at least 85%, as compensation, certain discounts on the trading fees to be paid.
On the NASDAQ , market maker companies are active in both commission and proprietary trading and represent a large part of the turnover on the NASDAQ. There are currently a total of 550 market maker companies, of which only about 10 are really important. All market makers in the USA must be members of the NASD ( National Association of Securities Dealers ) and meet certain requirements, such as: B. have a certain minimum capital. The market makers can be identified using a four-digit abbreviation, the so-called market maker identifier , the MMID.
species
There are generally three types of market making:
- When permanent quota ( English permanent market making , PMM), the market maker permanent buy and sell orders to a value in the trading system.
- The extended quotation ( english Advanced Market Making , AMM) are met by the relevant exchange specified minimum criteria in order to obtain appropriate reimbursements or benefits.
- When quoting on request ( English Regular Quotation ), the market maker provides a price on special request from a market participant.
Regulatory classification
The definition of proprietary trading subject to supervision also includes a definition of market making as a variant of the facts. § 1 para. 1a sentence 2 no. 4 lit. a KWG defines market-making as "proprietary trading by continuously offering the purchase and sale of financial instruments at self-set prices for your own account using your own capital". Must be distinguished is the proprietary trading from proprietary trading . Section 1 (1a) sentence 3 KWG defines proprietary business as the acquisition and sale of financial instruments for one's own account that is not proprietary trading. For the distinction between proprietary trading and proprietary business, the element "continuous" is of decisive importance. For the question of which order book presence can be used to speak of continuous liquidity provision, the principles of Art. 1 Para. 1 lit. b of Delegated Regulation (EU) 2017/578 can be used.
The general market-making definition in Section 1 (1a) sentence 2 no. 4 lit. a KWG records market making regardless of whether the market maker is obliged to provide a trading venue operator or the issuer with a continuous supply of liquidity for trading, and regardless of whether the market maker provides bid and ask prices, i.e. quotes, at the same time or is only present alternately on the bid and ask side of the order book.
The Securities Trading Act (WpHG) defines market-making as “the continuous offering of the purchase and sale of financial instruments on the financial markets at self-determined prices for your own account using your own capital” ( section 2 (8) no. 2a WpHG).
In addition to these regulatory market making definitions, which stipulate that the market maker provides a financial service , the definition of the market making strategy is of particular importance. According to Section 80 (5) WpHG , an investment services company that engages in algorithmic trading pursues a market-making strategy if it is a member or participant of one or more trading venues and its strategy for trading on its own account includes that it is in relation to one or more trading venues provides several financial instruments at a single trading venue or at different trading venues, fixed, simultaneous bid and ask prices of a comparable amount at competitive prices. The definition of the market making strategy is narrower than the general market making definition in Section 1 (1a) sentence 2 no. 4 lit. a KWG, ie not all market makers also pursue a market making strategy.
Other legal issues
A credit institution is only exempt from the prohibition of uncovered short sales in shares and public bonds if it acts in its capacity as a market maker. In this way, the market maker ensures market liquidity and influences the price. This also includes fixed-price business and the protection of these services (Art. 2 Para. 1k Short Selling Regulation). Market-making is not one of the "prohibited transactions" of Section 3 (2) and (4) of the KWG, which the major banks have been prohibited from doing since July 2016.
object
If you follow the regulatory market-making definition in Section 1 (1a) sentence 2 no. 4 lit. a KWG, financial instruments are the subject of market-making. The financial instruments within the meaning of the KWG are finally listed in Section 1 (11) KWG. This includes, for example, securities ( stocks , bonds , investment certificates ) and foreign exchange . In contrast, sorts and precious metals are not financial instruments. Therefore, for example, exchange offices that continuously offer the purchase and sale of currency are not market makers within the meaning of the KWG.
Use
The market maker’s counterparties reduce their execution risk, the risk of not being able to sell a security, and have the advantage of known buy or sell prices (no price risk ). With their activities, market makers have a stabilizing effect on price developments. The increased tradability is intended to increase the attractiveness and price quality of the assets under management and guarantee investors to be able to buy or sell at reasonable prices during trading hours. The trust acquired in this way is intended to promote positive price development in the long term. It is bound by a maximum spread (difference between bid and ask price). This continuous setting of courses is nowadays almost exclusively taken over by computer programs (so-called quote machines ). As part of corporate finance , market makers take care of price maintenance for other issuers . Market making activities play a key role in providing liquidity in the markets. With XETRA , the Designated Sponsor assumes the role of market maker, who must be approved as a trading participant.
Individual evidence
- ^ Harold Demsetz: The Cost of Transacting . In: The Quarterly Journal of Economics . Vol. 82, No. 1, 33 (35).
- ↑ Armin Hartmuth, Institutional Wandel von Börsen , 2004, p. 82 FN 254.
- ↑ Hartmut Schmidt, Wertpapierbörsen: structural principle, organization, cash and futures markets , 1998, p. 24.
- ↑ Hendrik Müller-Lankow: Differentiation of proprietary trading by market makers from proprietary trading by other liquidity providers . In: WM 2017, 2335 (2339 ff.) .
- ↑ Hendrik Müller-Lankow: Differentiation of proprietary trading by market makers from proprietary trading by other liquidity providers . In: WM 2017, 2335 (2336 ff.) .
- ↑ Hendrik Müller-Lankow: Differentiation of proprietary trading by market makers from proprietary trading by other liquidity providers . In: WM 2017, 2335 (2341 ff.) .
- ↑ Armin Hartmuth, Institutional Change from Stock Exchanges , 2004, p. 84.
