Futures Market Making

Market makers make their money by facilitating the trading of futures contracts. Market makers reduce the spread, or price difference, in a market so that traders pay a lower price. As an example, imagine a market where bids are at $1.50 and offers are at $2.00. Traders can’t trade at a fair price if there is a $.50 spread. A market maker could lower the spread to $.30, by bidding at $1.60 and offering at $1.90.

Futures market making is a practice in which a person who holds exchange trading privileges makes trades on a futures exchange. The purpose is to increase liquidity for lightly traded and newly listed futures contracts. Moreover, market makers take calls from customers for transactions. These firms also help the exchanges with price data. This type of trading helps in reducing volatility and enhance market liquidity. For this, it is important to identify the factors that drive scalping behavior.

Market makers help commercial users of futures contracts by managing their positions. Essentially, these professionals are like business owners who store stockpiles of a commodity. For example, a farmer selling corn can hedge his price risk by using a derivative such as a futures contract. The contract locks in the price at which he sells the corn. This way, the farmer does not have to worry about price fluctuations. Ultimately, market makers help to create liquidity in a market.

The exchange clearinghouse guarantees the performance of futures contracts. It also ensures that traders have sufficient funds to cover their obligations. To facilitate the trading process, traders are required to deposit a certain amount of money before opening a futures position. The initial margin deposit is referred to as margin money. This money is maintained in a separate account called margin. Margin money is adjusted daily to reflect the value of the futures contract.

In addition, market makers on open outcry exchanges don’t have affirmative market making obligations. But the Federal Reserve Board has determined that floor traders on futures exchanges should qualify for the Market Maker Exemption because they are the source of liquidity on a continuous or regular basis. A market maker is required to meet certain affirmative obligations, such as having adequate capital to meet the trading volume of the exchange. If a market maker is unable to meet these obligations, it may not be able to operate effectively.

Market makers play an important role in the Canadian derivatives market. Their role is to help improve liquidity by attracting and preserving customer order flow. Market makers are chosen by the Bourse from among its clients or approved participants. The rules governing the market maker program are published in section 3.112 and specific terms and conditions will be included in the publication. So, whether or not you are interested in becoming a market maker, it’s a good idea to get familiar with the rules and regulations.

In addition to providing liquidity and price transparency, market makers must also comply with relevant rules and regulations. A trader may request a quote by contacting an associated person or by directly initiating a quote request through a computer system. The trader may also place a consignment order to have the price of the contract met by the market maker. The price and quantity of the order reported by market makers must meet the specifications set forth by the TAIFEX and the relevant regulations.