Disadvantages of being a market maker
As the name itself suggests, market makers are the movers and shakers of the present generation markets both at the forex and the options market. Market makers are the ones responsible for breeding a market and partly for the direction in which the market moves, for how long it moves and when it should be offset.
What is a Market Maker?
A market maker is a firm or a trader or a combination of both, who have purchased a given stock option at their own risk. They then quote their own call and put price on the stock. An investor can then choose to buy from this particular firm or trader at the rate they are quoting. Once such an investment is made, the dealer then sells the options that he has, making a profit. It is good for an investor to deal through a market maker as a market maker buys the shares even if there is no buyer for his shares bearing the risk of drop in the price of shares, thus actually creating a market for his shares in a way. He then waits for a buyer with the best bid and sells him the shares earning profit.
For example, if an investor sells his shares at $200 each which is known as the ask price to the market maker and then the market maker sells the shares at $200.05 each to a purchaser which is termed as the bid price, thus getting profit of $0.5 on every share. Usually, the margin between the ask price and the bid price is very less, but a market maker deals in billions of dollars on every given day, thus yielding considerably good amount of money. A market maker earns on closing every sale, therefore, market is never bad for a market maker as no matter how the market swings from its lowest to its highest point, a market maker always manages to get his share.
So essentially, it is the market makers, who keeps the market constantly moving and on the go. They are the proxy controllers and ensure equilibrium in the stock markets. A market maker studies all the stock options and accordingly spreads his risk. If he feels that an option is going to rise in the future, accordingly he will change the call and put factors for the given option.
One of the major disadvantages of being a market maker is that if you call and put options are not good then you can end up being stuck with very bad options. This results in making a big loss for the market maker.
Another important feature is all the traders and firms are not entirely honest. They may jack up the rates of possibly an entirely worthless stock, leaving you in the strangle hold.
It's always safer to go for trusted brokers and firms who are market makers to get the best for your money's worth and minimizing your investment risk.