Designated Market Maker: Definition, Function, and Examples

Designated Market Maker Definition
Designated Market Maker: Definition, Function, and Examples

A designated market maker is an entity that the exchange stock has chosen to serve as the main market maker for a specific security.

Market makers are entities that are in charge of ensuring the market has adequate liquidity. Liquidity is the ease of purchase in a market, and market makers ensure this by buying and selling the same stocks. Market makers are also known as liquidity providers because they provide liquidity.

There has to be enough liquidity for a market to function. That means buyers should be able to find sellers, and sellers should be able to find buyers with ease. If a buyer and seller are readily available, the trade becomes instantaneous. Market markets help with the same by buying and selling a share simultaneously. 

For instance, a market maker would buy 100 shares of company X and at the same time sell 100 shares of company X as well. They create a spread while doing so, making money. For example, the asking price (selling price) would be Rs.102 if the buying price is Rs.100. The difference is called a price spread. Market markets usually make money through this spread. 

Each stock exchange will have designated market makers assigned. Market making is usually done by brokerage firms. But not all brokers need to be market makers. Not all market makers are brokers as, well. 

What is Designated Market Maker?

A designated market maker is a liquidity provider that is assigned by a stock exchange or an authority. A market maker or liquidity provider is an entity or a person that quotes both buy and sell prices of security in a stock exchange. The process is called market making. Market making is done to ensure there is enough liquidity and to help limit the volatility associated with each 

A designated market is an entity or an individual who is specialized in providing liquidity and is assigned by a stock exchange or an authority like SEBI and SEC. Each designated market maker could have assigned securities or a group of securities that they should take care of. They will continue to buy and sell these shares simultaneously to ensure that there is enough liquidity. Designated market makers also help control volatility.

What does a Designated Market Maker do?

A designated market maker is assigned with the function of facilitating liquidity. A market maker will put out an equal number of buy and sell quotations for a particular share. They will immediately sell off their positions (the stocks that they have bought) when they receive a buy request. The process minimizes the time between the buy and sells orders. In short, the order is completed within a short period of time. Buying and selling enable increased liquidity due to an increased number of transactions. Without the work of a market maker, a market could have difficulty in finding matches for buyers and sellers. 

But a market maker should continuously do the process. They should quote buy and sell prices at regular intervals. Hence, market makers help the market ensure the volatility of a stock is minimized as the stocks are priced according to supply and demand theory. Supply and demand theory suggests that more supply causes less demand and vice versa. More demand means a higher price, and less demand means a lower price. 

How much does a Designated Market Maker earn?

Designated market makers earn an average of $121,574 per year, according to Glassdoor. Market makers earn money through the bid-ask spread. Market makers are equipped to buy and sell stocks simultaneously to enable better liquidity. There will be a difference between the buying and selling price called the bid-ask spread.

Here, the bid price is the buying price, and the ask is the selling price. Let us take an example to understand further.

If a market maker buys stocks of a company for Rs.100 (bid price), the selling price would be mildly higher (for example, Rs.102 (ask price). The market maker makes Rs.2 profit here for each stock. Market makers usually involve purchasing multiple stocks. So if 10000 stocks are bought and sold here, the profit becomes Rs.20,000. Market markers make several such transactions per day. Such transactions enable them to earn significantly, especially on days when the market is bullish. At the end of the day, how much a designated market maker earn depends on the number of transactions.  Hence, it is difficult to gauge how much institutional market markets, like brokerage firms, make. But according to data from different sources, salaries of individual market makers in the US range from $28,490 to $123,790, with a median salary of $62,150.

How to be a Designated Market Maker?

An individual could choose a career to be a designated market maker. But the same needs them to have some qualifications that may differ from exchange to exchange. Below is a list of the same. 

  1. Although qualifications may differ for different exchanges, most will need you to have an undergraduate degree
  2. You need to have a deep understanding of stock markets, especially market matching, as it will help you with your job as well as acing the qualification tests.
  3. Next, you will need to attend the qualification test by the exchange. The qualification test is different for different exchanges. For example, NYSE needs you to pass the NYSE Arca Equity Trading Permits (ETP) test. The qualification test needs rigorous training, education, and orientation from NYSE.
  4. You could apply for the market maker registration once the preparation is over. The NYSE will consider your registration and take an appropriate decision. 

What are the examples of Designated Market makers?

There are three main types of entities you act as a designated market maker. They are brokerage firms, investment banks, and individuals.

Firstly, brokers are the most common market makers. Since they are involved in the functioning of the stock market by default, the process becomes easier for them.  Some of the market-making brokers are BDSwiss, BlackBull MarketsFP Markets, Pepperstone, and HotForex.

Investment banks are also common market makers. They also try to make a profit from the difference between the buy and sell prices. JPMorgan Chase and Goldman Sachs are examples of investment banks that are market makers as well.

Lastly, individuals could also be designated market makers. They have to be experts and have to go through different tests to be able to apply for the position. 

How does a Designated Market Maker work in the stock exchange?

The role of a designated market maker is to amplify liquidity and limit volatility. Market makers buy and sell stocks simultaneously to increase liquidity. Market making improves the matching in the stock market, enabling more trades. But when market markers sell, they do it at a price higher than the buying price, called a bid-ask spread. The difference in the price enables designated market makers to earn money. 

What are the best Designated Market makers?

The best market makers are often big brokerage and investment firms. Below are the top 15 market-making firms according to the volume of trade.

  • Virtu Financial
  • Citadel Securities
  • Two Sigma Securities 
  • Tower Research Capital 
  • Jump Trading
  • DRW 
  • Hudson River Trading 
  • Quantlab Financial 
  • XTX Markets
  • GTS
  • Tradebot Systems
  • Flow Traders 
  • IMC Financial
  • Optiver 
  • XR Trading 

Is it profitable to be a Designated Market Maker?

It is beneficial to be a market maker because they sell and buy at different prices, and the bid-ask spread enables them to profit from their trade. Market making is easier when the market is in a bullish mood. 

Does Market Maker lose money?

At times when the market is bearish, market makers may end up with slight losses as well. But this is usually a rare situation. In a bearish period, market makers have a significant role in trying to reduce volatility. 

Does NYSE have a Designated Market Maker?

NYSE, the largest stock exchange in the world, has 12 main designated market makers. The list of the NYSE market makers is below.

  • Credit Suisse Securities (USA) LLC
  • Deutsche Bank Securities Inc
  • Goldman Sachs and Company
  • IMC Chicago, LLC
  • Jane Street Capital, LLC
  • KCG Americas LLC
  • Latour Trading, LLC
  • OTA, LLC
  • Susquehanna Capital Group
  • Timber Hill LLC
  • Virtu Financial BD, LLC
  • Wolverine Trading, LLC

What is the difference between a Stock Broker and a Market Maker?

Stockbrokers and market makers are completely different. Stock brokers are the intermediary between traders and companies, while a market maker is a liquidity provider for the market. Some stock brokers are market makers as well, but not all market makers are stockbrokers. 

What is the difference between a Designated Market Maker and a Specialist?

A market specialist is an old term for market makers. Designated market makers used to be known as specialists till 2004.  

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