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What Are Market Makers in the Futures Market?

What Are Market Makers in the Futures Market?

By: Aiza Gill

Speculative traders often use futures contracts to speculate on the direction of prices of a particular commodity or financial instrument. In some cases, these contracts can be traded up to the expiration date. Market makers help reduce the spread between bid and offer prices, which reduces the costs of trading. Market makers are responsible for providing continuous quotes to traders on the floor. They are also responsible for responding to quote requests from traders.

Market makers provide liquidity for security futures trading. Market makers may also be responsible for groups of securities, or they may be responsible for a single security. The Federal Reserve Board considers regular liquidity on open outcry exchanges to be an acceptable criterion for market makers in security futures. If a market maker takes an affirmative obligation for security futures trading, they will be able to qualify for the Market Maker Exemption. This exemption requires the clearing member firm to clear the trades of the qualifying market maker. If the market maker’s trades meet the affirmative obligation, the clearing member firm will be granted a fee rebate. Moreover, the Market Maker Exemption requires the clearing member firm to meet the appropriate net capital requirements.

Futures Market making help provide liquidity in markets where there is a lack of liquidity. For instance, in a market with bids at $1.50 and offers at $2.00, the fair price is $1.75. Market makers capture this “bid and ask spread.” They then try to make a profit on the difference between the bid and offer. They may also decrease the spread by reducing the bids to $1.90, or they may increase the offers to $1.60. Whether or not they earn a profit on their trading depends on the risk that they are taking. Market makers are professionals, and their decision-making is different from that of retail traders.

Traders who are new to the futures market may want to consider selling smaller contracts. They may also want to take some time to build up their order size. They may also want to consider using options on futures to hedge their existing positions. These options can help reduce the cost of the futures contract, and they can be used to trade directly in more volatile markets. These options also provide diversification to their portfolio.

Market makers also help increase liquidity in lightly-traded futures contracts. If a market is low in liquidity, market makers help boost liquidity by quoting prices. These obligations are also beneficial to newly listed futures contracts. In addition to quoting prices, market makers can offer fees rebates to those who fulfill their obligations. These rebates are often used to offset the fees charged by the CET. Moreover, they also help lower transaction costs for traders.

Market makers have also helped improve the stability of certain markets. They have also helped improve the pricing efficiency of futures contracts, and have played a role in reducing the spread between bid and offer prices.

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