how market makers earn revenue
market makers are compensated for the risk of holding securities that they make markets for that may decline in value after they re purchased from sellers and before they re sold to buyers in addition they earn money from the aforementioned spread on each security they cover for example when an investor searches for a stock using an online brokerage firm it might observe a bid price of 100 and an ask price of 100 05 this means the broker purchases the stock for 100 then sells it to buyers for 100 05 through high volume trading a small spread can add up to a large amount of daily revenue market makers vs designated market makersmany exchanges use a system of market makers who compete to set the best bid or offer so they can win the business of incoming orders but some entities such as the new york stock exchange nyse have what s called a designated market maker dmm system instead previously referred to as specialists dmms are essentially lone market makers with a monopoly on the order flow of a particular security or securities because the nyse is an auction market bids and asks are competitively forwarded by investors 4here s how it works the dmm posts these bids and asks for the entire market to see and ensures they are reported in an accurate and timely manner they also make sure that the best price is always maintained that all marketable trades are executed and that order is maintained on the floor 4the dmm must also set the opening price for the stock each morning which can differ from the previous day s closing price based on after hours news and events they determine the correct market price based on supply and demand 4latest figure for the total market capitalization of domestic companies listed on exchanges in the u s 5market makers by exchangeas noted above market makers provide trading services for investors who participate in the securities market their activities through their entity trading accounts produce and boost liquidity within the markets exchanges throughout the world make use of market makers here are some of the most popular ones the nyse and nasdaq are the two main stock exchanges in the u s both are based in new york according to the nyse a market maker is an etp holder or firm that has registered to trade securities with the exchange 6over at the nasdaq a market maker is a member firm that buys and sells securities at prices it displays in nasdaq for its own account principal trades and for customer accounts agency trades 78some of the designated market makers in new york include the frankfurt stock exchange fra is one of seven stock exchanges in germany it is also the largest the exchange which is operated by deutsche b rse ag calls its market makers designated sponsors 10the following are some of the names of market makers on xetra which is the electronic trading platform of the exchange group london is home to one of the largest stock exchange groups in europe the london stock exchange lse is part of the london stock exchange group this group also includes the family of ftse russell indexes and the group s clearing services 12the following are some of the key market makers in this part of the world the tokyo exchange group combined the tokyo stock exchange and the osaka securities exchange into one unit in 2013 in addition to infrastructure and data the group provides market users with reliable venues for trading listed securities and derivatives instruments 14according to jpx the following are some of the key names among market makers toronto is considered to be canada s financial capital and it s the location of the country s leading stock exchange the toronto stock exchange tsx which is the country s largest exchange is owned by tmx group the tsx lists the following among its market makers market makers facilitate a smooth flow of market activity by making it easier for investors and traders to buy and sell without market makers there could be insufficient transactions and fewer opportunities to invest efficiently example of a market makerlet s say there s a market maker in xyz stock they may provide a quote of 10 00 10 05 or 100 x 500 this means that they bid they will buy 100 shares at 10 00 they ll also offer they will sell 500 shares at 10 05 other market participants may then buy lift the offer from the market maker at 10 05 or sell to them hit the bid at 10 00 