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Why Do We Need Market Makers?

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The capital market comprises several organizations that work in cooperation to keep things running. These are corporations, exchanges, corporations, and market makers (MMs) which provide bid prices and offers while infusing liquidity into the markets.

MMs are crucial for maintaining the market by introducing liquidity and smooth transaction execution by means of ensuring the number of transactions is large enough.

MMs provide liquidity and depth to markets. They earn revenue from the spread, that is the difference between bid and ask prices. Market makers are a vital part of the financial market, since they also provide trading services to investors and work for large institutions while dealing with an immense amount of securities to meet purchase and sales demands.

MMs make money by offsetting the risk associated with asset holdings, since they could see a security value decrease after buying it from a seller and before selling it to a purchaser. Every investment they cover is frequently subject to the aforementioned spread, which can result in substantial daily gains in high-volume trading.

MMs also execute trades on account of other investors and do their own trading. They may also be traders or independent market participants. The difference in quantity between the ask and bid prices, which they make when they go to market for their account, is referred to as the bid-ask spread. MMs that take on such risks have an advantage since they may benefit from the spread difference, that is the bids and offers difference.

Few traders are as prepared as MMs to buy and sell assets in rapidly shifting market conditions. Additionally, they keep the bid-ask spread low to reduce slippage for regular traders. However, there are also fewer MMs for less traded assets

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