Market makers

Markets only work well if there is a decent number of buyers and sellers, so that deals can get done. Otherwise, they become ‘illiquid’. Enter market makers. In the equity market these are specialist members of the London Stock Exchange – typically banks and brokers – who commit to trade shares and bonds, often in larger quantities than most other investors.

They are particularly useful in relatively illiquid markets for, say, smaller stocks, where dealing can be difficult. But be warned: each market maker sets its own buying and selling (bid and offer) prices and the gap (or spread) can be wide when few market makers compete to trade a security.

So the more market makers there are, the better, as it increases competition and keeps prices keener.

• See Tim Bennett’s video tutorial: What are market makers?

Merryn

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