market maker

A market maker is a dealer on the London Stock Exchange, who acts as a wholesaler (i.e. quotes buy and sell prices to brokers) for the shares in which he is registered to trade as a principal. Market makers fulfil buy and sell orders from brokers, and create a marketplace for the buying and selling of shares to match supply and demand.

The market maker makes a profit by committing his company's capital, aiming to buy low and sell high. There is always the possibility that he may buy high and sell low, thereby incurring a loss.

The market maker who buys 10,000 shares of Marks & Spencer at £2.58 will attempt to sell them at a higher price e.g. £2.60, thereby realising a profit of £200. Conversely, he could sell stock for £2.60 and later buy it back for £2.58, again realising £200 profit. However, market forces can cause the market maker to sell stock at £2.58 then, due to high demand, have to repurchase (recoup his short position) at a higher price of £2.64, thereby losing £600.

Stock prices constantly change, reflecting the supply and demand for those stocks. Low supply and high demand leads to high prices. High supply and low demand leads to lower prices.

The market maker is obliged to honour the price he reflects on screen in the size he is showing. This size is often larger than the NMS, which is the minimum size in which a market maker must quote a two way price.

If a broker wants to buy or sell a larger quantity of shares than the market maker is showing, i.e. showing 5x5 but the broker wants to buy 10,000 shares, the market maker may refuse to trade on these grounds. He is, however, still duty bound to sell the broker a minimum of 5,000 shares at the price shown. Furthermore, he may be able to offer him the full 10,000 shares, but the market maker can name the price.