Market Microstructure Flashcards
(6 cards)
What is a market maker?
What are the two main types of market structure?
A trader (usually a firm) that stands ready to buy and sell at posted prices. They provide liquidity by always being available to trade.
Order-driven markets – Prices come from traders placing buy/sell orders (e.g. stock exchange).
Quote-driven markets – Prices are set by dealers or market makers who quote buy/sell prices (e.g. forex market).
What is the bid and ask price?
Bid = price market maker is willing to buy at
• Ask = price they are willing to sell at
• The difference is the bid-ask spread.
What is a market maker?
What are the two main types of market structure?
A trader (usually a firm) that stands ready to buy and sell at posted prices. They provide liquidity by always being available to trade
Order-driven markets – Prices come from traders placing buy/sell orders (e.g. stock exchange).
Quote-driven markets – Prices are set by dealers or market makers who quote buy/sell prices (e.g. forex market).
What is the bid and ask price?
Why is the bid-ask spread important?
Bid = price market maker is willing to buy at
Ask = price they are willing to sell at
The difference is the bid-ask spread
It covers the risks the market maker takes, like:
• Price moving against them
• Trading with someone who knows more (information asymmetry)
• Holding inventory
How does a market maker make money?
They profit from the bid-ask spread.
Example:
• Buys at £9.90
• Sells at £10.00
• Makes £0.10 profit per share
What is liquidity?
Why do markets need liquidity providers like market makers?
The ease of buying or selling an asset quickly without changing the price too much.
Without them, buyers and sellers may not match up quickly → trading becomes slow and expensive.
