Market makers play a critical role in ensuring trading can take place in less liquid markets or instrument types.
They ensure that investors and other traders are always able to price and trade products by always being available to buy or sell those products.
Market makers operate in the markets for the following instruments:
- contracts for difference (CFDs)
- exchange-traded products (ETPs)
In most markets, market makers compete against one another while trading on their own accounts and at their own risk. Under contractual arrangements with ASX they are incentivised to achieve benchmark quoting requirements.
These quoting requirements are to ensure liquidity in the market so that traders are more easily able to trade into and out of an options position and other traders and investors can more easily price and value options positions.
Market makers can choose to have the following quoting benchmarks:
- make a market on a continuous basis
- make a market in response to quote requests
- make a market both on a continuous basis and in response to quote requests.
Market makers profit by charging higher offer prices than bid prices. The difference is called the ‘spread’. ASX puts in place limits on the maximum spreads that a market maker can quote when making a market.