Market-making and intermediation essay sample

In the capital markets, people got used to buying and selling a stock in a moment. As soon as a broker has processed the order, the transaction is successful. This process is so easy because of the existence of market maker waiting for the transaction on the other side. Market makers are banks and companies which operate whenever trade takes place. They impose steady ask and bid prices for the shares which are traded every moment even if there are no buyers or sellers on the other side of the transactions. Market makers practically play a role of intermediaries who assure trade without directly matching buyers and sellers.

Apparently, market-making involves certain risks. As stock prices constantly change, these companies take a risk while buying any shares; no one can be sure that the stock will remain stable the next day. To cover the risk, market makers maintain a spread on these shares. The difference between ask price and bid price is usually very small, nevertheless, market makers get a sufficient compensation for their risks while trading millions of shares every day.

However, trades in stock is a complicated system which does not come down merely to the parties which make a trade with the help of brokers. After a client instructs a broker to buy or sell particular shares, brokers refer to market makers for the best price. Nevertheless, the transaction may be executed only after it went through clearing and settlement by clearing house.