lol the cme doesn't make money? have you looked at their annual report?
How do exchanges make money off the spread?
- Thread starter kmiklas
- Start date
I think there's some confusion due to OP conflating exchange and market maker, when they are two different entities...
L
lovethetrade
https://www.thebalance.com/what-is-a-market-maker-and-how-do-they-make-money-4053753
What Is a Market Maker?
A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place a market order to sell your thousand shares of Disney, the market maker will actually purchase the stock from you, even if he doesn't have a seller lined up. In doing so, they are literally "making a market" for the stock. Without market makers, it would take considerably longer for buyers and sellers to be matched up with one another, reducing liquidity and potentially increasing trading costs as it became more difficult to enter or exit positions.
How Do Market Makers Make Their Money?
Market makers must be compensated for the risk they take. What if he buys your shares of common stock in IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares? To prevent this, the market maker maintains a spread on each stock he covers.
Using our previous example, the market maker may purchase your shares of IBM from you for $100 each (the ask price) and then offer to sell them to a buyer at $100.05 (the bid price). The difference between the ask and bid price is only $.05, but by trading millions of shares a day, he's managed to pocket a significant chunk of change to offset his risk.
What Is a Market Maker?
A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place a market order to sell your thousand shares of Disney, the market maker will actually purchase the stock from you, even if he doesn't have a seller lined up. In doing so, they are literally "making a market" for the stock. Without market makers, it would take considerably longer for buyers and sellers to be matched up with one another, reducing liquidity and potentially increasing trading costs as it became more difficult to enter or exit positions.
How Do Market Makers Make Their Money?
Market makers must be compensated for the risk they take. What if he buys your shares of common stock in IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares? To prevent this, the market maker maintains a spread on each stock he covers.
Using our previous example, the market maker may purchase your shares of IBM from you for $100 each (the ask price) and then offer to sell them to a buyer at $100.05 (the bid price). The difference between the ask and bid price is only $.05, but by trading millions of shares a day, he's managed to pocket a significant chunk of change to offset his risk.
Last edited by a moderator:
L
lovethetrade
I think he meant exchanges don't make money off the spread, market makers do.
There's no market markers with futures.
Last edited by a moderator:
Why not? Sure there are... Someone posts bids and offers...
You can quote of the spot price, although in index futures that will mean you'll be behind. You can also quote of an algo that uses correlations between several index futures...
Basically anyone who quotes a bid and ask price is technically a market maker, even if you only quote offers... or only bids...
A lot of people here have the idea that MM's mainly make money on the rebates. The rebates where introduced to draw more liquidity from market makers to secondary exchanges... incentives to quote... And sometimes it would mean that the MM could still make money by doing negative trades/scalps. But the first goal for a MM is to make money of the bid/ask spread. And by doing lots of trades, also hedging with other products... and in the end walk away with more cash than you started with.
This is a confusing thread...
The title asks how exchanges make money, while the actual post doesn't and instead focuses on market makers.
The title asks how exchanges make money, while the actual post doesn't and instead focuses on market makers.
L
lovethetrade
Thanks, it makes sense. Unfortunately, I was misinformed from reading another thread but that's no excuse because I know anyone can implement a market making strategy in futures.
https://www.elitetrader.com/et/threads/how-market-makers-work-in-futures.93705/page-3
The OP is aware the title is incorrect, it should be "market makers".