What is a Market Maker?
A Market Marker is an entity whose mandate is to buy and sell whatever the market trades in order to help keep the market moving, which is also known as being “liquid”.
In order to achieve this a market maker will hold inventory short term by ‘buying’ and then releasing the inventory by ‘selling’.
Markets of a certain size generally have Market Makers. They help the market by ensuring that trades are easily matched. Without Market Makers a market would not function as fairly and efficiently as it could, their benefits are distributed widely and felt by most market participants alike.
Why does Football Index have a Market Maker?
Football Index uses the services of an independent Market Maker who trades on behalf of accounts held by Index Labs Ltd (which owns BetIndex Ltd).
In the early days of Football Index we learned through customer feedback and experience, that there could be timing mismatches on supply and demand for a given footballer due to the constantly changing landscape of Football, and recognised it as an important element of a liquid market.
Our intention from this provision is not to profit from the trades but to provide liquidity as no market can function without it, so we have invested a significant sum over time in buying shares which are held by the Market Maker.
How does this actually work at Football Index?
The Market Maker is subcontracted from BetIndex Ltd (the operator of Football Index) to another group company to avoid any conflict of interest. As Football Index develops, we expect further third-party Market Makers to participate in the market.
The Market Maker has policies that they must adhere to as set out by a mandate from Bet Index Ltd. These restrictions include and are not limited to: the volume of shares that are eligible to purchase, when they can purchase them as well as the class of shares that they are eligible to trade.
Market Making involves buying and selling shares through trading accounts and this activity is limited through financial controls relating to the scale of the market. The Market Maker is not permitted by the board at this time to hold more than a small percentage of the market, this is designed to avoid having significant impact on pricing.
This type of trading makes up a small percentage of market trading volume, it involves buying shares from the Sell Queue to help reduce its length but may also at times involve buying shares not in the Sell Queue to manage and hedge risk.
In order to facilitate complying with these policies and to also to help manage the substantial risk that the Market Maker is undertaking they have a different level of access from other customers.
With the future introduction of order books and other 3rd party Market Makers, this function will become more sophisticated with multiple orders on both the Buy & Sell side of the order book for increased liquidity.
The way that Football Index currently makes this liquidity available is by consistently quoting both the Buy Price and where possible a price that it is willing to buy shares (Sell Price). The difference between these two prices is called the ‘Spread’. This is done in order to reduce panic selling and avoid building risky positions that could impact the integrity of the market to Market Making, as noted in our Game Rules.
If a Player or the market comes under pressure (Concentration Risk or Market Shock), Spreads are widened or Instant Sell can be suspended. This is done in order to reduce panic selling and avoid building risky positions that could impact the integrity of the market, as noted in our Game Rules.
What is the benefit of Football Index having a Market Maker for our traders?
As a result of the Market Maker’s activities more trades are completed successfully through the Sell Queue, hence avoiding the current spread associated with Instant Sell.
However, the Market Maker must balance their book and ultimately sell inventory. This could make Sell Queues increase however, on balance the Market Maker will buy more than they sell as their activity is designed for their inventory to remain steady.