Published on Thursday, April 11, 2019 by Chittorgarh.com Team
Market makers are registered members of the stock exchange (stockbrokers) who undertake the buying or selling of securities in the stock market at specified prices at all times.
Market makers help listed companies in improving the liquidity and better price discovery of the stock. They simply infuse liquidity to thinly traded stocks. They also monitor the trading in the script and report it to exchange in case of any irregularities.
Market making is done in stocks, futures, and options.
Market makers display buy/sell prices for a number of shares. Once an order is received from the buyer, the market maker sells from its own holdings to complete the order.
Market makers are paid for the risk they take. They are also allowed to place 2-way orders (buy and sell) at the same time. For example, they can place in the range Rs 100 – 102. They will buy stocks at 100 and sell them at 102. They keep the profits made.
Market makers for the particular security are recommended by the merchant banker (lead manager) to the exchange at the time of filing DRHP for IPO or at later point of time. The lead manager of the issue and the issuer (promoters of the company) choose the market markers.
Market making was first introduced in 2012 in India. List of approved market makers is available on the website of BSE and NSE.
Most SME platform listed stocks struggles with liquidity. Many investors stuck with an SME stock in case of absence of buyers.
Market Making is a facility where the market maker is required to provide eligible 2-way quotes in securities listed and traded on the SME platform.
Market maker helps with the liquidity issues of an SME stock. Market making is mandatory in respect of all securities listed and traded on SME Exchange.
Merchant bankers ensure market making through brokers of SME segment for a minimum period of 3 years from the date of listing of security issued.
Market making is carried out only by eligible trading members (brokers) registered as market makers with the exchange where security is listed.
There shall be a minimum of one and maximum of five designated Market Makers for every security traded on the SME segment.
Following are the eligibility criteria for Market Makers at NSE:
As per the guidelines provided by NSE, the roles and responsibilities of market makers are:
Market makers get an incentive to recommend the securities to the investors and thereby creating a market for the lesser traded options.
For IPO's, the issuer company pays to Market Makers with help from the lead managers.
Exchanges also provide incentives for market making.
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