'Market-making' refers to the practice of quoting bid and offer rates to 'make a market'.
A benefit of market-making is that the price-making bank obtains more market information. Being aware of the transactions which are taking place in the market is important if the bank follows a strategy of taking positions.
It is not always desirable for banks to deal at their own prices. If rates are moving quickly in one direction because of a bias in the market, banks will be better off if they square their positions by dealing at market rates.
For example, if a bank is long USD 2,000,000 at JPY 108.10 and a very large trade deficit is announced, all market participants may expect rates to fall. Banks will tend to lower their quotes and possibly widen them as uncertainty grows. As there will be many keen sellers and possibly no keen buyers, it would be folly for a bank to wait in the vain hope of being able to sell at its offer rate. The prudent course would be to square off its position by dealing at another banks bid rate, and to trend its rates down accordingly. This will probably result in the bank taking a loss, but it is better to take a small loss now than to be caught and incur a much larger loss later.
Subscribe to:
Post Comments (Atom)
3 comments:
If rates are moving quickly in one direction because of a bias in the market, banks will be better off if they square their positions.
Great to read on market making, as of now I am using tips from epicresearch.co only, but now had known more about this term.
Hey, I am using Intraday SGX Signals to trade in stocks, so is market making term is used for the same also.
Post a Comment