I.11. Who is a market maker. What is the market maker’s interest in?

When working in the market, you should know who a market maker is. It is necessary to understand whether he represents evil or is a useful market participant.

The market maker works under an agreement with the exchange and performs a number of special functions, the main of which is to maintain the liquidity of the instrument, besides being a full-fledged market participant, has full information about all applications and can carry out manipulations, earning on it. The responsibility of the market maker is to ensure the execution of customer requests at the expense of its own assets. To do this, he acquires and stores certain volumes of the object of the auction, exposing them at the right moments to buy or sell. The responsibilities of a market maker are determined not only by the contract with the exchange, but also by legislation, including maintaining prices, supply, demand and trading volume, determining the opening price of a trading session, maintaining the balance of the market.

The market maker sees the full picture of the market and can influence it by executing orders at the best price.

The opening price should correspond to the interests of the majority of sellers and buyers. This is provided by the market maker.

The legislative responsibility of the market maker is to ensure the balance of the market. For these purposes, a market maker can create multidirectional orders, forming the size of the spread, buying / selling traders’ orders if there is no other party. I.e., if there are no sellers or buyers in the market, a market maker takes their place to ensure the course of trading. Sometimes a market maker has to buy in a falling market and sell in a growing one to restore the balance, which leads to his losses at a certain stage of trading, but gives a significant profit when the market reverses.

The market maker’s interest lies in the price difference in the spread, the exchange’s remuneration under the contract, maintaining its own trading positions on obviously better terms than other market participants. The activity of a market maker is strictly regulated so that his work does not turn into a purely speculative game.

Thus, the market maker is not the enemy of the trader, but in fact his employer, because you can earn only when the market is in motion. The actions and presence of the market maker can be tracked by the glass of transactions and the schedule. Using this information and understanding the logic of the market maker’s actions gives you the opportunity to move along with him.

Let’s show by example exactly how a market maker works and how it can be used to choose a trading strategy (Fig.1).

How do market makers work?

Fig.1. The operation carried out by the market maker on the Mechel JSC stock. In Figure 1, we see how the market maker pushes the price up, starting from the beginning of January 2020, then maintains the price above 100 rubles with an additional push on January 15, 2020 and then from March 1-16, 2020 returns the price back to the level of 55 rubles. In this case, a good option for entering a deal is a short (sale with a loan) at the confirmation bar at the end of February 2020 (we will discuss the transaction strategies in more detail later in this book). Now I ask you, dear reader, to pay attention to such a trick, because this is the main way to create waves in the Russian market and in the cryptocurrency market. Judge for yourself about the possibilities and terms of earnings – 50% of the price change in 2.5 months.

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