Question

Explain the function of market makers, how they operate and what risks they face. (200 words max + tables if required)

Answer 1

A market maker is a firm or an individual who is responsible for placing two way quotes in order to gain from the bid ask spread in the market.

Functions of the market makers are as follows-

1. These market makers provides liquidity in overall market.

2. Market makers helps in fair price discovery of a commodity or a stock through placement of large shares which help in price discovery mechanism.

3.2market makers reduce the basic risk as well as trading risk for various kinds of market participants

4. They usually work for helping the investors and protecting their interest through share price discovery and liquidity infusion in the market.

there are multiple risks which are faced by the market makers because they will need to have adequate liquidity and they can also suffer a large amount of loss because they are only trying to get through the bid ask spread and in case there is a fierce movement in the stocks they will also be the losers.