What does "Make a Market" Mean?

Malcolm Tatum

"Make a market" is a term that is used to describe a specific action that is taken by a broker or dealer as part of the services provided to clients. Essentially, the broker-dealer is said to make the market when he or she is ready, willing, and able to conduct a transaction involving a specific security at the bid and ask price quoted as part of the order. This type of activity can be related to just about any market situation, including over-the-counter transactions.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Various terms are used to identify a broker or dealer who is ready to make a market. When the transaction will take place in an over-the-counter environment, the dealer is often referred to as a market maker. In situations that involve potential transactions on an exchange, the broker is often called a specialist. Both terms tend to indicate that the broker or dealer has made adequate preparation in terms of evaluating an investment opportunity and has arrived at the pricing that must be available before the transaction will take place. Along with the implication that the broker or dealer has specific reasons for the quote issued, there is also the understanding that the professional is ready to back up that quote by placing an order as soon as the quoted bid and ask price are presented within the marketplace.

Choosing to make a market can provide significant benefits for clients of the broker or dealer. By publicizing the quote to others in the financial community, the chances of connecting with the right buyer or seller within a reasonable period of time are enhanced. This means that the broker or dealer is then in a position to aid his or her client in arranging a transaction that may be crucial to a specific strategy that the investor wishes to implement. Since prices on stocks and commodities can change rapidly, time is often an important factor in deciding to make a market. By structuring the order with the right combination of bid and ask prices, that order is not delayed unnecessarily and the potential to reap more returns from the order is greater than simply attempting to create this type of order on the spur of the moment.

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As with any type of investment strategy, the decision to make a market must take place after considering the various scenarios surrounding investment that is directly related to the order in question. This means making sure that projections of how the market value of the asset will move are accurate and that those movements are in keeping with the overall strategy of the investor. Since there is always some risk that the performance of the asset will shift once the order is executed, it is important to be prepared for that contingency, developing a plan that calls for holding, selling, or repurchasing the asset if doing so would be in the best interests of the client.

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