What Is Market making?
Market making is a crucial function in financial markets that involves providing liquidity and facilitating trades.
Market makers are firms or individuals who stand ready to buy and sell a particular asset on a regular and continuous basis at publicly quoted prices.
Process: They simultaneously provide bid (buy) and ask (sell) prices for a security, profiting from the spread between these prices.
Function: Market makers ensure liquidity in the market, reduce price volatility, and enable smoother trading by being willing to trade when other buyers or sellers might not be immediately available.
Market makers are especially important in less liquid markets or for less frequently traded securities. They take on inventory risk by holding positions in securities, which allows other market participants to trade more easily and efficiently.
In decentralised finance, a specific form of market making is used, called liquidity provision. AMM (Automated market maker) is a specific type of decentralised exchange where liquidity providers do not need to adjust their positions to react the market situation, but the price of an asset is determined by bonding curve.
Market makers often do not want to take inventory risk and try to stay delta neutral when providing liquidity.
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