Market Makers Flashcards
❓ What is a market maker?
✅ A firm or individual that buys and sells securities to provide liquidity and facilitate trading.
❓ Why are market makers important?
✅ They ensure buyers and sellers can always trade, reducing price volatility and improving market efficiency.
❓ Who regulates market makers?
✅ Market makers are regulated by FINRA and the SEC to ensure fair trading practices.
❓ How do market makers make money?
✅ They profit from the bid-ask spread – the difference between what they pay for a stock (bid) and what they sell it for (ask).
❓ What happens if a stock has no market maker?
✅ It may become illiquid, meaning it’s hard to buy/sell without a big price change.
❓ What is a bid price vs. an ask price?
✅ Bid Price: The price a market maker pays to buy a stock.
✅ Ask Price: The price a market maker charges to sell a stock.
❓ Who are some well-known market makers?
✅ Citadel Securities, Virtu Financial, and Jane Street are major market makers on exchanges like NASDAQ & NYSE.
❓ Example: How does Citadel Securities act as a market maker?
✅ Citadel executes millions of trades daily, providing liquidity for stocks like Apple (AAPL) and Tesla (TSLA).
❓ Example: How does a market maker react to breaking news?
✅ If a company like Nvidia (NVDA) announces strong earnings, market makers may increase the bid price because more buyers want the stock.
❓ What is inventory risk for a market maker?
✅ If a stock drops in value after the market maker buys it, they may lose money.
❓ How do market makers manage risk?
✅ They use hedging strategies and algorithmic trading to balance inventory and reduce losses.
❓ Why do market makers widen the bid-ask spread during volatility?
✅ To protect against sudden price swings, ensuring they don’t take on too much risk.
