How do they make profit? Can any financial firm become a market maker? Can an individual be a market maker?
In: Economics
Market makers bring together enough buyers and sellers to create a working market. This can involve a few possible activities:
1) Recognizing the need for a new market. This could be noticing the rise of a new good or service (like all the crypto exchanges that popped up during that boom) or inventing a new good that people might want to trade (like a financial derivative).
2) Reducing transaction costs: Maybe this is something people have already traded for a while, but you’ve found a way to make it easier to trade. You could argue that this is what Uber and Lyft have done by linking drivers and people who need a ride through an easy-to-use app.
3) Building networks: For very thin or rarified markets (like art or antiquities), knowing everyone who might want to buy (or sell) the good means you’re the one everyone turns to when they want to make a transaction.
Market makers collect their money as a commission from the people who use their markets. This is usually a pretty easy sell because you’re talking about people realing gains from a trade that they wouldn’t have made without your help. Even if you collect some of that surplus, buyers/sellers still prefer trading through your mechanism to not trading at all.
Whether a single person can be a market maker depends on the market. As noted above, sometimes market makers are just THE person to talk to about buying/selling a particular rare object. For bigger markets, you probably need a more complex/robust organization to manage all the trade.
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