Posted on April, 19, 2018

Written by IMC ,

Posted in Trading

As one of the world’s leading market makers, IMC trades on more than 100 venues around the world and provides liquidity in more than 200,000 securities. But what is market making? The video we produced to answer this question has become one of our most viewed so we decided to transcribe it and answer the question in writing:

When someone wants to buy or sell a product, they need to make their way to an exchange where buyers and sellers meet. The price they can trade at depends on the supply and demand of the product at the moment and this is translated into the bid (price to buy) and ask (price to sell) spread. 

If there are limited counterparties to trade with, then it may not be possible to buy or sell the product, and the product is now considered illiquid. In order to guarantee liquidity, exchanges ask professionals to continuously provide a bid-ask spread to the market. In other words these professionals make markets, hence the origination of the term market makers. 

Market makers do not have an opinion on whether the price of the product should go up or down. They make money on the difference between the bid and ask price - the spread. When a market-maker trades on either side of the spread, they take a position in the market which is a risk. They will try and find a way to offset that risk by, for example, hedging that position with a different product.

 

A market-maker must therefore not only understand the product they are making markets in, but also the relationship with other similar financial products.

 

Over time, competition and technology have significantly changed the job of market makers. In order to continuously provide competitive quotes on multiple exchanges, and multiple products, computers running trading algorithms are needed along with electronic exchange connectivity. Market makers need to continuously invest in both technology and people to remain competitive and contribute to efficient financial markets. This is something IMC is committed to.

While these technology advancements and competition have made the job of market makers significantly more complex, for investors - those wanting to buy and sell the product - they have provided real benefits in reducing their transaction costs to buy/sell, for example, through the tightening of the bid-ask spread. 

Besides IMC's on-screen market making in many asset classes globally, we are also a Designated Market Maker (DMM) on the New York Stock Exchange and our ETF desk in Europe leverages our experience, advanced technology and deep liquidity, to offer competitive pricing directly to qualified counterparties.

Interested in trading with us? Contact our ETF team in Europe or our DMM team in the US

Interested in a career with us? Check out our open roles.