Market Makers for Options – Who are they?
An options market maker is an individual, or a large financial institution, that has a contractual relationship with an exchange, such as the Chicago Board Options Exchange.
Market makers ensure a certain level of liquidity in the options market to ensure that trading functions smoothly. It is not necessary to understand what market makers do if you are an options investor, unless you aspire to work for a financial institution in this field.
However, it is useful for investors to understand why they exist and the effect they have on the options market. This article will provide such useful information.
Market makers have large and diverse portfolios of different option contracts. With these wallets, they can trade their own options contracts whenever they want. For example, if a trader wants to buy option contracts, but there is no specific seller at the time, market makers will sell option contracts from their portfolio to the trader. Or if a trader wishes to sell option contracts, but there is no specific buyer at the time, the market maker will buy the option contracts from the trader. This ensures that trades are processed quickly in the options market, even if there appear to be no willing buyers or sellers.
Without market makers, traders would not be able to buy or sell options as quickly. There would be fewer transactions in the market as a whole. A reduced number of transactions means that there is a decrease in investments. This leads to less funds being available for businesses, which in turn hurts businesses and the economy as a whole.
Market makers maintain volume and liquidity in the financial markets, including the options market. The flow of the options market would stagnate without the work of market makers. These market makers also have an important role in keeping the markets moving quickly and efficiently. This function leads to more transactions, investments and money in the whole economy.