How do they make profit? Can any financial firm become a market maker? Can an individual be a market maker?
In: Economics
The other answers seem to be approaching the point but let me add my .02: Market makers don’t create markets (that’s what exchanges do), but they make the markets viable. What does this mean? Well, basically, lets say there’s a bad day in the oil markets and you’re a commodities market maker. Well you would, in that scenario, buy the oil nobody wants. You *make the market* viable by creating liquidity. That’s what keeps bid-ask spreads tight. This is why trades can go through and why there seems to always be a buyer (on popular products at least). You know/hope that the prices will go up and you make your money back. This is like your everyday trading but MM hedge (balance the risk) by 1) buying similar products (maybe it was crude oil that was taking a hit and they’d buy natural gas? Idk I’m not a MM). In options this means buying something with the same expiration on the same underlying, but with a step up or down in strike. And 2) doing it on a HUGE scale. So basically MM is just a strategy which actually helps everybody. Since they profit on the bid/ask spread, they basically make a tiny bit of money in exchange for making the market more efficient.
Can you be a market maker? I don’t know, how much money and experience do you have? In theory, anybody can become a MM, but there are requirements which vary by exchange. Plus, you need a ton of infrastructure and data to do it properly in modern times. Usually market makers operate on certain exchanges, but not all of them. For example, here are the requirements to be a MM on NYSE ARCA: https://www.nyse.com/markets/nyse-arca/market-making
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