If all Market Makers start moving their offer prices lower to tempt in buyers and offload stock, certain traders could view this as negative for the short term. If Market Makers are keen to sell stock they may want to lower their offer price to tempt buyers in. If Market Makers want to buy shares because they may think the stock is heading up or they are short of stock they have to raise their bid price if theirs is not the best bid on the screen. With the example of IMG above, why would a seller want to sell shares to UBSW at 380, when the seller can deal with MLSB or AITK and receive 385p per shares? If UBSW wants to purchase shares, the Market Maker has to raise its bid price. The Market Makers are effectively in competition with each other. In this situation he has sold stock he has not got, to fulfill all the buy requests, and he has to buy this stock in to balance his books, but at higher prices and makes a loss. And vice versa - if a share is rising sharply the Market Maker has to continue selling the stock to the buyers - he could end up "short" of stock. If the price continues to fall he could be left with a lot of stock on his hands that he paid considerably higher prices for than he can sell for now. ![]() If there is a flood of sellers, because the Market Maker's job is to provide liquidity, he has to buy those shares even though the rest of the market may want to sell. Market Makers obviously have a degree of risk. there will always be a price you can sell your stock at, there will always be a price you can buy some stock at (unless the share is suspended). They provide the market with liquidity - i.e. The Market Maker works for an institution that makes a market (will buy and sell) that particular stock. When you buy and sell shares in most circumstances (SEAQ/AIM) your broker has to go through a Market Maker. The Market Maker only makes money when they are buying and selling, so the Market Maker will prefer to see the business go through their books at a reduce margin than allow it to go to another Market Maker. When your broker calls the Market Maker he is giving them the opportunity to 'bid' for the business, the Market Maker may well improve on the price on offer via the screens. ![]() This is because Market Makers compete with one another for business. Your broker using the same systems as you now have can sometimes get a better price than those on the screen. Market Makers are however known to lower prices to "panic" investors into selling, sometimes called "shaking the tree"? Moving the price up, encourages sells, moving it down also encourage sell, hence also the term dead cat bounce when a Market Maker will mark a falling stock up to encourage buyers in thinking they have reached the bottom.Ī good pricing system such as Level 2 will give you an indication which Market Makers are keenly priced. Market Makers are duty bound to make a market and to meet the needs of those they are responsible, to this end they may try to influence the market. ![]() Market Makers are not elusive companies that appear then vanish overnight. "Market Manipulation" is an emotive term, and conjurers images of shady deals and exploitation. It is often felt that the Market Makers manipulate the prices. The more actively a share is traded the more money a Market Maker makes. Market Makers make money from buying shares at a lower price to which they sell them. The converse is true also if there is a consistent and large enough demand for a share, then the Market Makers will increase the price. ![]() For example, if holders of very large amounts of a share decide to sell (or a combination of a lot of holders of small amounts), then the Market Makers will reduce the price that they are prepared to pay for the share. The prices may vary (sometimes considerably) during the day, depending on a number of influences. The Market Makers act as retailers of shares and display their prices during working hours. ADVFN Home Help Level 2 The SETS screen A Background to the Market and Market MakersĪ Background to the Market and Market MakersĪ Background to the Market and Market MakersA Market Maker runs a 'shop' and you buy shares from him or sell them back to him.
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