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Market Making

In: Theoretical Foundations of Investment Banking

Author

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  • Andreas Krause

    (University of Bath)

Abstract

Investment banks also facilitate trading in security markets by acting as counterparty to a trader who seeks to buy or sell the security. A buyer (seller) would buy (sell) the security from the investment bank at prices they state publicly prior to the trade. Therefore, the buyer (seller) is not reliant on the presence of another trader who wishes to sell (buy) the security. The investment bank will sell (buy) the security, with the aim of buying back (selling) the security to another trader at a later point. The aim of the investment bank is not to hold the security, but only to offset the position as soon as possible. This activity is referred to as market making or acting as a dealer. It facilitates trading for the benefit not only of the clients of an investment bank, but all market participants as the orders are submitted anonymously and the market maker is neither able nor allowed to discriminate between traders.

Suggested Citation

  • Andreas Krause, 2024. "Market Making," Springer Texts in Business and Economics, in: Theoretical Foundations of Investment Banking, chapter 14, pages 189-199, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-58060-4_14
    DOI: 10.1007/978-3-031-58060-4_14
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