(d) Outline 3 ways a market maker can participate in a trade? Why is trader and computer systems speed important?…
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(d) Outline 3 ways a market maker can participate in a trade? Why is trader and computer systems speed important? (5 marks)
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Technifi Expert’s Answer:
A market maker is an entity like a brokerage house or an individual intermediary who as a market participants or member firm of the exchange buys/sells securities at the system quotes price and volume.
Market Makers can participate in a trade by buying and selling securities at prices it displays in an exchange’s trading system for its own account which are called principal trades and for customer accounts which are called agency trades. Market makers also can participate through electronic trades.
Market makers maintain buy and sell quotes within a spread so that there is liquidity by providing seller for every buy order and vice versa. Since market maker trades on their own account also where they hold inventory of a particular security they provide a guaranteed supply of a specific volume of a security at the displayed quotes for counterparty. Thus they help maintain liquidity, provide market depth and long term growth as well as curb volatility as they are governed by exchange laws and cannot profit beyond a point.
Fast computer systems help in execution of a trade which is imperative given how frequent and fast price of a security fluctuates based on constant bids. The trade executed must be done real time or the fluctuations of price in the interim will defeat the equitable purpose of a trade.
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