Thanks SCENE for sharing.
In general…
The role of market making is to provide liquidity to the market by offering bids and asks for a particular pair. This allows traders to buy or sell at any time, regardless of market conditions.
By providing liquidity to the market, market makers help to stabilize prices and reduce volatility. This makes it easier for traders to buy or sell without having to worry about price fluctuations or lack of available counterparties.
Market makers also help to narrow the bid-ask spread, which is the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept.
This makes trading more efficient and reduces trading costs for all participants in the market.
In exchange for providing liquidity, market makers earn a profit from the bid-ask spread.
They buy the contract at the bid price and sell it at the ask price, making a profit on the difference between the two prices.
Overall, market making plays a crucial role in an exchanges by providing liquidity, reducing volatility, and improving the efficiency of trading. By continuously quoting buy and sell prices, market makers help to ensure that there is always a ready supply of contracts available for traders to buy or sell, which helps to build trust and confidence in the market.
Market making involves risks, and there is always a chance of losing money. Market makers may face losses due to a variety of factors, such as adverse market conditions, unexpected events, or technical problems. However, the extent of these losses will depend on the market maker’s trading strategies, risk management techniques, and the overall market conditions.
One of the primary risks in market making is inventory risk, which is the risk of holding a large position in a particular asset that moves against the market maker’s position. This can result in losses if the market moves in an unfavorable direction.
Another risk in market making is market risk, which is the risk of losing money due to unexpected market events, such as sudden price movements or market crashes.
Overall, the chances of losing money in market making depend on a variety of factors, such as the market maker’s trading strategies, risk management techniques, and the overall market conditions. While there is always a chance of losing money, market makers can mitigate these risks by using appropriate trading and risk management strategies and staying informed about the market conditions.
Market makers is not the house.