CoachA market maker is a firm that continuously offers to buy and to sell the same instrument, at a lower price to buy (its bid) than to sell (its ask), and trades with whoever accepts. It risks its own capital and aims to end each day with little or no position.
Examples
Example 1.3 (The dentist’s order)
The market is bid, ask: , , and the spread is of the price. The dentist’s market order buys at the ask and pays the half-spread, $0.01 a share, that is $1.00 on her hundred shares. That dollar is the market maker’s gross revenue on the trade — before the price has had a chance to move.
Example 1.7 (Five firms, one table)
| Whose capital | Paid by | Holding period | Main cost | |
|---|---|---|---|---|
| Market maker | owners’ | the spread | seconds to hours | technology |
| Proprietary firm | owners’ | trading profit | seconds to weeks | technology, people |
| Hedge fund | investors’ | fees on assets and profits | days to years | people |
| Asset manager | clients’ | fee on assets | months to years | distribution |
| Bank desk | shareholders’ | spread and client business | minutes to months | capital |
The rest of the series keeps returning to this table: a technique that is central to one row (speed, for the first) is irrelevant to another (the fourth).