The Software Powering Today’s Market Makers

The term “market maker” might sound like someone waving a wand to create a bustling bazaar out of thin air. And while there’s no actual magic involved, what market makers do is no less impressive. They are the unsung heroes of liquidity, ensuring that the buying and selling of stocks, forex, and crypto assets happen smoothly. But behind these financial wizards lies something even more powerful: software.

But first, let’s level on the definition of market makers.

Who are market makers?

Market makers are financial firms that facilitate the trading of assets by providing buy (bid) and sell (ask) prices. They stand ready to buy or sell these assets at publicly quoted prices, effectively creating liquidity in the market. Their goal is to ensure that there is always a counterparty for a trade, reducing the time it takes for transactions to be completed and stabilizing prices.

Here’s what exactly they do to perform their mission.

1. Market makers continuously quote two prices for a given asset: the bid price (the price they are willing to buy at) and the ask price (the price they are willing to sell at). This dual quoting ensures that there is always a ready buyer and seller for the asset.
2. When investors want to buy or sell an asset, they can do so immediately at the market maker’s quoted prices. The market maker will either sell from their inventory or buy the asset to add to it. This immediate execution of trades prevents delays and ensures that the market remains active.
3. Market makers hold an inventory of assets they buy and sell throughout the trading day. They carefully manage this inventory to minimize risk and maximize profit, often using sophisticated algorithms to adjust their quotes in real time based on market conditions.
4. The difference between the bid and ask prices is known as the spread. Market makers earn a profit by capturing this spread on each trade. For example, if a market maker buys a stock at $100 and sells it at $100.10, they earn $0.10 per share traded.

How are market makers different from liquidity providers?

Liquidity providers are more like the wholesalers who supply goods to the market but aren’t always at the stall. They bring depth to the market by ensuring a healthy supply of assets available for trade, but they don’t necessarily stick around all day to quote prices. They might swoop in when the time is right, adding their assets to the mix, but they don’t have to quote prices 24/7 like their market-maker cousins.

So, while every market maker is a liquidity provider, not every liquidity provider is a market maker. Market makers are the dependable, always-on presence that keeps things ticking smoothly, while liquidity providers might be more opportunistic, stepping in to add volume when it suits them.

Surely, market makers don’t do their magic manually but rather take advantage of special software.

The secret sauce: What does market-making software do?

At its core, market-making software is all about automation. Gone are the days of traders shouting orders on the exchange floor (although let’s be honest, the Wall Street drama was fun to watch). Today, algorithms handle most of the heavy lifting. These programs constantly monitor the market, adjusting prices and orders to keep things moving efficiently.

Imagine trying to juggle ten balls while walking a tightrope—and the balls are on fire. That’s what market makers do, except they have software that makes it look easy. This software uses complex algorithms to predict price movements, place orders, and manage risk, all in the blink of an eye. It’s like having a team of financial Einsteins working around the clock, minus the coffee breaks.

Here’s a breakdown of the critical software components market makers typically need:

1. A trading platform allows market makers to place and manage orders, execute trades, and interact with exchanges.

A good fit from the Devexperts product line is DXtrade XT, a trading platform tailored for firms working with stocks, options, futures, mutual funds, and bonds. It features high-speed order execution that market makers need to place and execute orders within milliseconds. DXtrade XT also supports multiple assets and can be complemented with DXtrade CFD, XT’s instance for trading FX and CFDs.

Another important thing is that DXtrade XT has a full range of risk management tools to manage exposure and ensure compliance with risk limits.

2. Market data feeds

Our subsidiary market data provider, dxFeed, helps market makers rely on real-time and historical data to make informed trading decisions and accurately price assets.

3. An order management system (OMS)

OMS helps market makers manage and route orders to exchanges and trading venues. DXtrade XT’s OMS offers real-time management of orders, positions, account balances, and fractional and notional trading capabilities. The ebook about fractional and notional trading explains all the perks of our OMS.

4. Risk management tools

They’re essential for monitoring and mitigating the financial risks associated with market-making activities. They should feature pre-trade risk checks to ensure that trades comply with set risk parameters before execution, real-time risk monitoring to track positions, margin requirements, and exposure in real time, and scenario analysis to simulate different market conditions and assess potential risks.

These features are again available through the DXtrade XT risk management package and its full-fledged trading simulation environment.

5. Charting and analytics software

Advanced charting tools help market makers analyze trends, identify patterns, and make informed trading decisions. Our financial charting library, DXcharts, shines here, providing indicators and tools to perform in-depth technical analysis of price movements, custom charts tailored to specific trading strategies, and data visualization for the graphical representation of market data, which is crucial for quick decision-making.

Key features to look for in software for market making

So, what makes market-making software stand out? Here’s a quick rundown:

Speed

In trading, milliseconds matter. Good market-making software operates at lightning speed, executing trades faster than you can say “buy low, sell high.”

Customizability

Not all market makers are the same. Some focus on stocks, others on forex, and some on the crypto game. The best software allows for customization to suit different strategies and asset classes.

Risk management

Markets can be unpredictable—remember that time Bitcoin took a nosedive? The right software has built-in risk management tools to minimize losses during turbulent times.

Data analytics

Market-making isn’t just about making trades; it’s about making smart trades. Advanced software provides data analytics and insights to help traders understand market trends and refine their strategies.

Bottomline

Without market makers, the financial markets would be much less efficient. Prices would be more volatile, and it would be harder for investors to buy and sell assets at fair prices. In short, market makers are the oil that keeps the engine running smoothly. The software they use is the high-octane fuel that powers the whole operation.