Market maker

market maker or market maker  in English, are entities that can be companies or individuals and that comply with the regulation of the financial market as participants of the same through a contract with the Governing Company of the latter, in order to offer purchase and sale prices continuously . Its main objective is to provide liquidity in the operations carried out in the secondary market .   

The market maker acting as stabilizing prices and that should be your role, although in some cases they are looking to take advantage of inefficiencies in the market and generate large profits, which can give the existence of conflicts of interest.

This figure can operate in any kind of financial asset and market such as market  fixed income ,  equities , foreign exchange market , derivatives market , etc. Market makers will have the obligation to offer counterpart to those investors who want to buy, offering sales positions and vice versa. For this, the market makers will keep in their portfolio a stock of assets and securities to be able to offer executions of operations in case they do not exist at a certain time.

In Spain, this figure is regulated by an order of the Ministry of Economy and Finance of February 10, 1999. There are a number of requirements to be a market maker.

Requirements

  • Be the owner of a securities account in your own name in the market that you wish to trade.
  • Comply with the requirements established in terms of the provision of technical and human resources, as well as satisfy the other economic and legal conditions necessary to be considered as members with full powers in at least one of the regulated markets or multilateral systems of negotiation determined by the General Directorate of Treasury and Financial Policy and the National Securities Commission (CNMV), mostly.
  • A sufficient number of Market Makers must commit to trading and trading securities in those regulated markets or multilateral trading systems, so as to promote liquidity in the market.
  • To access the status of Market Maker, interested entities must send a request to the General Directorate of Treasury and Financial Policy and the CNMV, in which they will express their intention to be Market Makers.
  • The General Directorate of the Treasury and Financial Policy, following a report from the Bank of Spain, taking into account compliance with the requirements set forth in previous points, may grant the status of creator, provided that the entity’s experience of the financial instruments in which pretend to be a member, be considered sufficient and ensure that the compensation and liquidation of its operation is carried out safely and efficiently.

Example

There are many market makers that act as Brokers , and must comply with regulatory regulations in the country in which they are established.

In Spain, the body that establishes these regulations is the National Securities Market Commission (CNMV). But many of the brokers are established in the US or England, where the regulatory bodies are the National Futures Association –NFA-, Commodity Futures Trading Commission – CFTC- (in the US) and the Financial Services Authority –FSA- (in England). There are criticisms of the Market Maker brokerage models , because they have money tables and base their models on double accounting, also called hybrid accounting, with accounts A and B, where in some cases they launch their customers’ orders to the market, but not in others, and what they do is cover themselves, there are possible conflicts of interest.

In this area, it is very important to choose the right type of broker and see your financial health, through the verification of your commercial register and the provision of own resources or coverages that you may have in case of insolvency. It will not be the same company that is registered with 3,000 euros, than another that has a guarantee of own resources of 3,000,000.

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