Market Maker and Market Taker – Foreign Exchange Tutorials

What is Market Maker and Market Taker?

Let’s learn more about Market Maker and Market Taker. There are two parties to a quotation, the market maker and the market taker. The market maker is the bank that quotes the price. It is the bank that calls to ask the market maker for price. Having been quoted the price, the market taker accepts it, in which case a deal is contracted, or rejects it, in which case no transaction occurs.

A liquidity provider is a company or an individual that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid–ask spread, or turn. The U.S. Securities and Exchange Commission defines a “market maker” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price.

A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that they will take a position in a particular assigned security, option or option index.

Market makers that stand ready to buy and sell stocks listed on an exchange, such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), are called “third market makers”. Most stock exchanges operate on a “matched bargain” or “order driven” basis. When a buyer’s bid price meets a seller’s offer price or vice versa, the stock exchange’s matching system decides that a deal has been executed. In such a system, there may be no designated or official market makers, but market makers nevertheless exist.

Practice Exam Questions

1. What is a market maker?
A) A person who buys and sells stocks on the stock exchange
B) A financial institution that facilitates the buying and selling of securities by providing liquidity
C) A government agency that regulates the financial markets

2. What is the role of a market maker?
A) To make profits by buying and selling securities at the right time
B) To provide liquidity in the market by buying and selling securities
C) To regulate the financial markets and ensure fairness

3. How does a market maker make money?
A) By buying securities at a low price and selling them at a high price
B) By charging a commission for every transaction they facilitate
C) By earning a spread between the bid and ask prices of the securities they buy and sell

4. What is the bid-ask spread?
A) The difference between the highest and lowest prices of a security over a certain period of time
B) The difference between the price a market maker is willing to pay for a security and the price they are willing to sell it for
C) The percentage of a company’s profits that is paid out to shareholders as dividends

5. How does a market maker provide liquidity?
A) By buying securities when there are more sellers than buyers
B) By selling securities when there are more buyers than sellers
C) By always being willing to buy or sell securities at the bid or ask price, regardless of market conditions

Answers: