STSM124040 – Financial Markets: Types of Financial Brokers and Traders: Market Makers – HMRC Internal Handbook

In the UK, a prime broker may also apply to the London Stock Exchange (LSE) to register as a market maker for particular stocks. The market maker must register on a per share basis and for larger companies there may be multiple market makers competing with each other for business.

The role of a market maker is to ensure that there is always “a market” in which investors can buy and sell shares of the companies for which they are a market maker.

A market maker‘s primary obligation is to publicly quote a two-way price per share for each stock for which they are registered as a market maker. In the UK, this is done using a computerized Stock Exchange Automated Quotation System (SEAQ) screen. (See STSM122020).

For example, a stock may be priced at:

240p – 244p

The lower price (240p) is called the bid price and is the price at which the market maker will buy the stock from other brokers. The higher price (244p) is the offer price, the price at which the market maker will sell the shares to other brokers.

The difference between the bid and ask prices is called the “spread” and is the basis of the market maker’s profit.

After making an investment decision, a broker will initiate the transaction with the market maker over the phone. Market makers are required to trade at the request of other brokers and cannot refuse a trade.

In return for accepting obligations to act as a market maker, firms obtain the following privileges:

  • Only market makers are authorized to enter prices on SEAQ
  • They are exempt from SD/SDRT on purchases
  • They are able to borrow securities to cover short-term positions through stockbrokers.
  • They have access to the inter-dealer broker network which allows them to buy and sell large volumes of securities anonymously

Market makers can also use the SETS system (STSM122020) to place stock buy orders.

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