Crypto Market Makers Made Some Markets

In financial markets, there are people called “market makers.”1 A market maker, as the name implies, makes things called markets. But the market that a market maker makes is not, like, “the stock market.” “Market,” here, has a somewhat technical meaning. “Making a market,” in this context, means typing into a Bloomberg message, or saying over the telephone, two numbers: the price at which the market maker is willing to buy some security, and the (somewhat higher) price at which she is willing to sell it. So a customer will say “make me a market in XYZ bonds” and the market maker will type “100 / 100.5,” or say “par at a half,” and that — “100 / 100.5” — is her “market.” And the customer might say “sold to you at 100,” and she will buy the bonds at 100 cents on the dollar, or the customer might say “I buy at 100.5,” and she will sell him the bonds at 100.5 cents on the dollar. And the market maker makes her living by selling at her offer (100.5) and buying at her bid (100).

You could, with some justification, imagine a broader and more intuitive meaning of “market maker.” The market maker’s job is to stand ready to buy or sell XYZ bonds, whichever customers want, all the time. If customers want to sell, the market maker will buy; if customers want to buy, she will sell. By providing this service, she facilitates trading in the bonds. If the market makers all went away, there might not be much trading in the bonds: Customers who wanted to buy would have no one to buy from, and customers who wanted to sell would have no one to sell to. Perhaps that is a solvable problem: The customers who want to buy can buy from the customers who want to sell. Perhaps there can be brokers to introduce them to each other. Lots of markets operate with a broker structure, without market makers. But it is probably helpful if market makers exist. We talked yesterday about how Apollo is setting up a structured credit trading desk, i.e., a market making desk, because it can’t syndicate structured bonds to investors if the bonds don’t trade. In theory, the bonds could trade among the investors, without Apollo making a market in them. In practice, Apollo is setting up the desk.