A liquidity provider is a broader term describing what market makers, in particular, do. They commit to being actively present in the markets at all times so that investors know they can always buy or sell as soon as they want to, and will always receive a reliable price, even in volatile markets. This certainty creates confidence within markets which, in turn, encourages ongoing investing – a virtuous cycle known as “liquidity.”

Any participant in the financial markets that contributes to liquidity can be classed as a liquidity provider because every trade consists of two participants: the buyer and the seller, and both provide liquidity to one another. But not all types of liquidity provider have a formal designation, whereas market makers are a regulated category of liquidity provider that comes with specific obligations, including the obligation to quote continuously and be ever-present in the markets.

On any exchange-traded market, the “bid” is the highest public price a buyer is willing to pay, and the “ask” or “offer” price is the lowest public price at which a seller is willing to sell, at any given point in time. The difference between the bid and ask price is called the “bid and ask spread” or simply “bid ask spread”.” 

 When a market maker buys or sells, they can very quickly trade on the opposite side. For example, if they buy a stock or bond, they can almost immediately sell it again if someone else is trying to buy. This helps them to manage the risk that the price of that stock or bond could move against them. When they quickly trade again, they hope to capture the “bid and ask spread” as their compensation. In this example, to sell that stock or bond for slightly more than they bought it for. It is most likely that they’ll need to hedge their position to offset their risk with a different product.

Automated trading is where computer software is used to fully automate order generation. Computers are linked to market data, which is fed into algorithms, and then automatically place orders in the market. Although the systems trade by themselves, they are controlled by both a risk manager and commands within the automated trading software.

Market volatility is when the financial markets experience periods of unpredictable price movements upwards or downwards. Market volatility can be caused by political and economic factors. A moment of political unrest in a country, for example, might provoke a negative reaction in investors. Likewise, sector and industry factors can cause volatility. For example, an adverse weather event in an area that produces oil might cause oil prices to increase suddenly, and this can have knock-on effects across the market for other sectors too.

Because market makers are always ready to trade and with the best price, market makers help to guard against market volatility and liquidity risk, creating more resilient financial markets for everyone.

Capital markets describe any exchange marketplace where financial securities and assets are bought and sold. They may include trading in stocks, bonds, commodities and derivatives on these asset classes. Examples of capital markets in Europe include Nasdaq, The Intercontinental Exchange, The Chicago Mercantile Exchange, the London Stock Exchange, Euronext, Deutsche Boerse, CBOE and many others. All these markets provide public prices any investor can see and interact with. Market makers are fundamental to the fabric of capital markets because they are always ready to buy and sell, as soon as investors want to, and at the best prices. Their contribution helps to create resilient capital markets that enable companies and societies to thrive.

Buy side is a term used in relation to financial trading and, as the name suggests, it refers to organisations that sit on the “buying” side of the transaction. Their counterpoints are known as the “sell side”. The types of organisations that can sit on the “buy side” of transactions include asset managers, mutual funds, pension funds, insurance firms, hedge funds, private equity investors, retail investors.

“Sell side” is a term used in relation to financial trading and, as the name suggests, it refers to organisations that sit on the “selling” side of the transaction. Their counterpoints are known as the “buy side”. Proprietary traders and market makers (including investment bank prop desks) are known as the “sell side”.

A liquidity provider is a broader term describing what market makers, in particular, do. They commit to being actively present in the markets at all times so that investors know they can always buy or sell as soon as they want to, and will always receive a reliable price, even in volatile markets. This certainty creates confidence within markets which, in turn, encourages ongoing investing – a virtuous cycle known as “liquidity.”

Any participant in the financial markets that contributes to liquidity can be classed as a liquidity provider because every trade consists of two participants: the buyer and the seller, and both provide liquidity to one another. But not all types of liquidity provider have a formal designation, whereas market makers are a regulated category of liquidity provider that comes with specific obligations, including the obligation to quote continuously and be ever-present in the markets.

On any exchange-traded market, the “bid” is the highest public price a buyer is willing to pay, and the “ask” or “offer” price is the lowest public price at which a seller is willing to sell, at any given point in time. The difference between the bid and ask price is called the “bid and ask spread” or simply “bid ask spread”.” 

 When a market maker buys or sells, they can very quickly trade on the opposite side. For example, if they buy a stock or bond, they can almost immediately sell it again if someone else is trying to buy. This helps them to manage the risk that the price of that stock or bond could move against them. When they quickly trade again, they hope to capture the “bid and ask spread” as their compensation. In this example, to sell that stock or bond for slightly more than they bought it for. It is most likely that they’ll need to hedge their position to offset their risk with a different product.

Automated trading is where computer software is used to fully automate order generation. Computers are linked to market data, which is fed into algorithms, and then automatically place orders in the market. Although the systems trade by themselves, they are controlled by both a risk manager and commands within the automated trading software.

Market volatility is when the financial markets experience periods of unpredictable price movements upwards or downwards. Market volatility can be caused by political and economic factors. A moment of political unrest in a country, for example, might provoke a negative reaction in investors. Likewise, sector and industry factors can cause volatility. For example, an adverse weather event in an area that produces oil might cause oil prices to increase suddenly, and this can have knock-on effects across the market for other sectors too.

Because market makers are always ready to trade and with the best price, market makers help to guard against market volatility and liquidity risk, creating more resilient financial markets for everyone.

Capital markets describe any exchange marketplace where financial securities and assets are bought and sold. They may include trading in stocks, bonds, commodities and derivatives on these asset classes. Examples of capital markets in Europe include Nasdaq, The Intercontinental Exchange, The Chicago Mercantile Exchange, the London Stock Exchange, Euronext, Deutsche Boerse, CBOE and many others. All these markets provide public prices any investor can see and interact with. Market makers are fundamental to the fabric of capital markets because they are always ready to buy and sell, as soon as investors want to, and at the best prices. Their contribution helps to create resilient capital markets that enable companies and societies to thrive.

Buy side is a term used in relation to financial trading and, as the name suggests, it refers to organisations that sit on the “buying” side of the transaction. Their counterpoints are known as the “sell side”. The types of organisations that can sit on the “buy side” of transactions include asset managers, mutual funds, pension funds, insurance firms, hedge funds, private equity investors, retail investors.

“Sell side” is a term used in relation to financial trading and, as the name suggests, it refers to organisations that sit on the “selling” side of the transaction. Their counterpoints are known as the “buy side”. Proprietary traders and market makers (including investment bank prop desks) are known as the “sell side”.