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Market Maker Quoting Obligations Do Not Require Trading

Article Quant Q&A · Author: Owen B
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Summary

The document clarifies whether market makers must trade when they are the only participants showing orders. It distinguishes designated market makers, whose exchange rules may require them to maintain two-sided quotes within a specified width for a certain share of the time, from traders who use a market-making style without formal exchange designation.

A quoting obligation is not an obligation to cross the spread or execute a trade. Resting bid and ask orders remain ordinary executable orders; a trade occurs when compatible incoming interest interacts with them. Informal market makers may have no exchange-imposed quoting requirement at all. The explanation is concise and provides no specific exchange rules, so actual obligations depend on the venue and its program. Its main practical lesson is to separate the duty to provide displayed liquidity from a duty to initiate transactions.

Key ideas

  • Designated market makers may be required to maintain bid and ask quotes under exchange rules.
  • A quoting requirement does not require the market maker to cross the spread or initiate a trade.
  • Self-described market makers may simply follow a passive trading style without formal obligations.
  • Specific quoting conditions depend on the exchange and its market-making program.

Tags

Market makingMarket microstructureExecution
Full text
# Market makers order execution on the order book


# Market makers order execution on the order book












If a market maker is required to always have at least one order on a certain side of the order book (buy or sell), if there's no one else in the market and just market makers left on the book, will they just automatically trade shares then? Or are the "orders" placed in the book by market makers some special kind of order that doesn't actually get executed?

## Answer by JoshK (score 2)

https://quant.stackexchange.com/a/50815

Owen, designated market makers in general are required to send in a two sided market (a bid and and offer) within a certain width for a certain percentage of the time. There's no obligation to cross the market and actually trade.

Also, many people who self-identify as market-markers are not really designated by any exchange and have no obligation even to make a two sided market. In that case the term "market-maker" refers just to the style of passive and continuous trading.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.