Resolved: What is a market maker?
In the video there was a scheme demonstrating the possibilities of arbitrage if you buy a stock on NYSE and sell on LSE. But such arbitrage is impossible because of market makers. And is this market maker an individual financial institution or simply an exchange? I've got confused about terminology because I often saw the term "market maker" in laws and didn't get what is meant before the one.
Hello Ruslan!
Thanks for reaching out!
Arbitrage remains a viable strategy in today's financial markets, albeit with greater difficulty due to technological advancements and heightened competition among market makers.
Market makers are specialized firms that facilitate the buying and selling of securities while also providing liquidity to financial markets. They profit by purchasing securities at lower prices and selling them at higher prices, or vice versa. In addition to generating profits, market makers help to maintain efficient markets by reducing bid-ask spreads and offering liquidity to other participants.
Arbitrage opportunities arise when there are price discrepancies in the same or related securities across different markets or platforms. For instance, if a security is priced lower on one exchange than another, an arbitrageur could purchase the security on the lower-priced exchange and sell it on the higher-priced exchange to capitalize on the price difference.
Market makers are critical players in financial markets, and they often work to eliminate arbitrage opportunities by quickly buying and selling securities to maintain efficient prices. They leverage advanced trading algorithms and high-speed connections to react rapidly to market movements and maintain a competitive edge. This makes it more challenging for individual traders to profit from arbitrage opportunities.
Despite the obstacles, arbitrage opportunities do still exist in financial markets. However, they have become more challenging to identify and exploit due to the increasing efficiency and competition among market makers.
Hope this helps!
Best,
The 365 Team