(1) Demand and Supply Analysis of Market Maker Services
Market makers provide a trading service, and the price of this service is measured by the spread of securities. The service price of market makers and the price of securities are two different things. Market makers insist on buying quotations and securities at any time and selling quotations and securities, that is, market makers provide real-time services in the market. Then, the economic effect of market makers is reflected in the demand and supply of market-making services, not the supply and demand of securities themselves.
The market demand for market maker services is mainly due to the fact that the general public buyers and sellers of a particular security are not all balanced in the process of market operation, so an intermediary institution is needed to stabilize this temporary imbalance through its own intermediary transactions, which is an artificially accelerated market equilibrium system relative to a perfectly competitive market.
In order to analyze the relationship between supply and demand, we can show it with a relatively intuitive coordinate diagram (see figure 1). Assuming that the initial price of a security is P0, if the buyer's purchasing power exceeds the seller's at this price, there will be imbalance, and the difference is A-B; If public sellers and buyers can't match for a period of time, this imbalance will continue, which is obviously a kind of damage to market efficiency.
Without the participation of market makers, a certain number of buyers can't meet the purchase demand because they don't have the corresponding amount of securities supply, or they have to buy at the price of P 1 higher than P0, but it depends on the purchasing power of market participants, that is, not all public participants have a high ability to pay. If market makers are willing to sell securities at a price lower than P 1 but higher than P0, the actual price will deviate to some extent. However, this deviation will reduce the purchase cost of all market buyers. Although the transaction price is still higher than the initial price, it will bring a lot of transactions and meet the needs of market participants, and improve the operating efficiency of the whole market. This is the demand base of market maker service.
Of course, in any market (including the command-driven market without market makers), there will always be some mechanism to respond to the imbalances listed in Figure 1 (such as speculators in the securities and futures market). However, the defect of a market without a market maker is that investors cannot trade at any time, and the market itself does not provide immediate and direct services. Therefore, the spontaneous stability of this imbalance is sporadic and lagging, and the recovery of imbalance is costly, which is far less efficient than the long-term and sustained large-scale market-making service of market makers. In the organized market maker's market, before the disequilibrium appears, the market maker will limit the opportunity of disequilibrium through its market-making service activities, so this kind of reaction and restriction is beforehand. Of course, the provision of market-making services here is based on economic interests, that is, the income from buying at a low price and selling at a high price.
In fact, in a competitive market, the difference between the market maker's buying quotation and selling quotation reflects the cost or profit of providing market-making services. Unless the profit of market-making service can make up for its cost, brokers will not always engage in this market-making business. The fluctuation of the transaction price around the real price shown in Figure 1 is limited by the quotation difference set by the market maker, indicating that the higher the cost of providing market-making services, the greater the bid-ask quotation difference, and the greater the possible fluctuation of the transaction price based on the real price. Therefore, the reasonable feature of the market maker market should be to provide market maker services at the lowest possible cost. Of course, this is also a common principle in all markets, but the cost here depends on the economic situation of the general public traders and the degree of competition among brokers.
⑵ Analysis of Market Maker's Quotation Difference
In the two-way quotation in the securities and futures market, there is a price difference between the buying price and the selling price. The existence of this price difference is reasonable and basically consists of two parts. The first is the cost of market makers providing two-way quotations to public investors. It also includes direct costs and indirect costs. Direct cost refers to the cost of purchasing computers and other equipment and establishing related networks, the wages of market makers and decision makers, and the cost of delivering transaction documents. Indirect cost refers to the research and development expenses of collecting, sorting out and analyzing market information and predicting the future trend of the market. The second is the profit obtained by market makers in providing quotation services. In the process of two-way quotation by market makers, under the ideal situation of two-way transaction with the same amount, market makers must have spread income. While providing services to the public, we also earn profits for ourselves. It is this trading organization mechanism that is mutually beneficial to the market and the market makers themselves, ensuring the balance and liquidity of the market.
The decisive factors affecting the bid-ask spread of market makers include:
Trading volume of market-making securities. The greater the transaction volume, the smaller the difference. To some extent, the securities with large trading volume are also liquid, which can shorten the holding time of market makers and thus reduce their inventory risk; Moreover, it can make it easy for market makers to achieve certain economies of scale when trading, and it will also reduce costs, so there is no need for too much difference.
Fluctuations in securities prices. The greater the fluctuation, the greater the difference. Because in a given holding period, the risk of securities with high volatility to market makers is greater than that of securities with low volatility, as compensation for this risk, the spread will naturally increase.
Price of securities varieties. Judging from the absolute amount of spread, the spread of securities with high market price will be greater than that of securities with low market price; Judging from the proportional spread (quotation spread relative to securities price), the lower the securities price, the greater the proportional spread.
Market competition pressure. The more market makers there are, the stronger the competitiveness is, and the stronger the constraint to limit the deviation of the quotation difference of a single market maker, so the smaller the difference is. Market makers compete with each other in order to get more market-making spread income. Competition urges market makers to do everything possible to reduce costs and profits, and the final result is to gradually narrow the quotation spread. Moreover, securities with more market makers are more active and more liquid, and the risk of market makers is smaller, and the difference as risk compensation is smaller.
Market makers are not market makers.
In Hongkong and Taiwan Province, people are used to equating the market maker with the "banker" and calling the market maker system the banker system, which leads to misunderstanding of the market maker system in China, including investors and regulators. "Banker" is simply an institutional investor who makes huge profits by manipulating stock prices. It means that an institution, by virtue of its capital and information advantages, controls a considerable part of the circulating stocks of one or several listed companies in a planned way in the securities market, and obtains the manipulation position of the stock price trend of this or these listed companies, thus realizing huge profits. Therefore, "banker" has become synonymous with market manipulators. Judging from the A-share market, bookmakers have existed for many years, so the market has become accustomed to it, and there is even a saying that "no village can't make a market". Objectively speaking, for the securities market, bookmakers have a positive effect on stimulating trading interest, but compared with their damage to market efficiency, investment rationality and resource allocation, the disadvantages obviously outweigh the advantages. Therefore, the Securities Law, Measures for the Administration of Futures Trading and other laws and regulations prohibit the manipulation of the stock market price. Therefore, it is necessary to investigate and deal with the banker's behavior in order to strengthen supervision and improve the standardization of the development of the securities and futures market. This paper holds that "banker" and "market maker" are by no means equivalent concepts. The market maker system is a legal system that meets the requirements of market economy, while it is illegal for a banker to sit in a village that does not conform to the rules of market economy. Specifically, the difference between the two is reflected in the following aspects:
The purpose of the operation is different. The implementation of the market maker system, from the direct purpose, is to ensure the continuity of individual stock trading and avoid the phenomenon of market without market. Therefore, market makers have two basic market-making responsibilities: first, public quotation, that is, quoted "buying price" and "selling price" for their market-making stocks; Second, within the quotation range, as long as investors are willing to buy, market makers must sell, or as long as shareholders are willing to sell, market makers must buy. And "sitting in the village" and "making the market" are completely different. The purpose of banker's operation is not to ensure the continuity of individual stock trading, but to make huge profits by sitting in the village.
Trading risks are different. If the market maker continues to lose money after quoting the selling price of a security, the market maker must further reduce the selling price, even lower than the original buying price of the market maker, until the stock has a certain transaction record. In this process, market makers may lose money, and the reason for this loss is that market makers must "make the market" to ensure the continuity of transactions. Therefore, this is not only the obligation of market makers, but also the inherent requirement of market maker system. Because of the possibility of such institutional losses, it is necessary to give certain preferential policies to market makers. On the other hand, the risks of Zhuang banker mainly come from: first, information leakage, that is, when Zhuang's information is leaked to other institutions, the latter chooses the opposite operation, and the banker will suffer losses when its strength is equal to or even exceeds that of the banker; Second, strategic mistakes, that is, in the process of financing, too much or too little financing, too little or too much financing, too early or too late shipment, resulting in losses; Third, insufficient funds, that is, the total amount of funds used by the banker to sit in the village is not enough to meet the needs of raising funds and pulling up the high position operation, which leads to the failure and loss of sitting in the village; The fourth is information error, that is, the information when the dealer chooses to sit in the village is inaccurate, untrue or incomplete, which leads to the failure of sitting in the village; Fifth, the bookmakers are fighting among themselves, that is, when several institutions join hands to sit in the village, some institutions withdraw from the joint ranks because of uncoordinated interests and different business opinions, which leads to the inability to continue to sit in the village. Obviously, although there are risks in the process of banker sitting in the village, this is by no means to ensure the continuity of transactions, nor is it an inherent requirement of the system. The information situation is different. In the market maker system, the list of market makers is open, which is a kind of "sunshine market making". Its market-making behavior is entirely based on public information, and it is strictly forbidden to collect and use internal information and insider information through various improper means, and it is strictly forbidden to spread misleading information and rumors. Its trading behavior should be reported to the regulatory authorities regularly. Sitting in the village is an underground act. In addition to public information, bookmakers also try their best to collect all kinds of internal information, use insider information and even spread misleading information. Use information asymmetry to induce Zhuang's followers to "take the bait" and profit from it. At the same time, in the process of sitting in the village, the banker kept his manipulation strictly confidential and tried to cover it up by various methods such as dividing the warehouse.
The impact on market trends is different. For market makers, it is not allowed to manipulate the stock price, nor can it directly affect the market price trend. Just to maintain the continuity of transactions, market makers have the function of maintaining the normal operation of the market. In China stock market, the position of banker is far superior to that of ordinary investors. They can use their own financial strength and other favorable conditions to "suppress" when the stock price wants to go up and "raise the price" when the stock price wants to go down, so that the rise and fall of individual stock prices are in an unpredictable situation for ordinary investors, and it is easy to disrupt the normal trend of the stock market. At the same time, due to a large number of "sucking up", "pulling up" and "shipping" from low prices, it is easy to form excessive fluctuations in stock prices. Third, because bookmakers usually "ship" at high prices, ordinary investors are "stuck" in high positions.