A Market Maker is a firm that continuously quotes both buy and sell prices for securities, providing liquidity and enabling trading.
Core Obligations
| Requirement | Description |
|---|---|
| Two-way quotes | Must display both bid and ask prices simultaneously |
| Firm prices | Obliged to trade at quoted prices up to stated size |
| Trading hours | Continuous presence during all exchange hours |
| Spread limits | Must quote within maximum permitted spreads |
| Normal Market Size | Minimum quote size for each security (NMS) |
Where Market Makers Operate
On the LSE, market makers are crucial for SETSqx securities, providing continuous quotes between periodic auctions. They must be registered for specific securities and approved by the exchange.
For highly liquid SETS stocks, market makers are less necessary - the order book provides natural liquidity from competing participants.
How Market Makers Profit
Market makers earn through the bid-ask spread:
They also gain from:
- Inventory management and positioning
- Order flow information advantages
- Volume-based earnings (many small spreads)
Why They Matter
Market makers ensure:
- Trading possible when natural buyers/sellers absent
- Price discovery in inactive markets
- Reduced volatility by dampening extremes
- Guaranteed execution at firm prices
Regulation: FCA conduct rules, LSE rulebook, MiFID II framework