Definition +  Role

As markets have evolved from their historic open-outcry system to today’s electronic trading platform, the market makers’ role has remained largely unchanged.

Market making has three main functions:

i) to maintain an orderly market
ii) to enhance liquidity
iii) to provide market intelligence

All of these functions are linked.  By definition, an orderly market requires a reasonable level of liquidity.  If a stock’s liquidity is improved, it will display trading characteristics that make it more appealing to investors. Wider investor participation creates a more orderly market which in turn attracts more liquidity. Quality market intelligence creates opportunities for trade which would not otherwise exist, thereby enhancing liquidity.

Of course, this feedback loop operates in the opposite direction when any of these functions is degraded or ignored.