5) Market Mechanics
What is Market Maker
Ever wonder why you can always buy or sell a stock whenever you want? That's because market makers are always ready to be on the other side of your trade. Without them, the stock market would be like a pop-up market — sometimes busy, sometimes deserted.
Definition
A market maker is an institution or market participant that continuously places buy and sell orders, ensuring there's always liquidity. They profit from the spread between the bid and ask prices they quote.
Simple Explanation (Analogy)
Think of a currency exchanger at the airport. They always display two prices: their buying rate for dollars (lower) and their selling rate (higher). You can exchange anytime because they're always ready. The buy-sell gap is their profit. Stock market makers work exactly the same way — always ready to buy and sell, earning from the spread.
Indonesian Stock Example
On the Indonesia Stock Exchange (IDX), some large securities firms like Mandiri Sekuritas, BCA Sekuritas, and Indo Premier act as market makers for certain stocks. For example, ETFs traded on IDX always have designated market makers ensuring the ETF price doesn't stray too far from its NAV.
How to Use
- Choose stocks with active market makers (usually LQ45 stocks) for tighter spreads and faster execution.
- Check whether an ETF has a designated market maker — this prevents you from buying at a price far from fair value.
- Don't try to out-trade market makers. If you're scalping in stocks with active market makers, they have speed and information advantages.
Common Mistakes
- Thinking market makers are manipulators — they actually make the market fairer and more liquid.
- Not realizing that in illiquid stocks without market makers, you may struggle to sell even when the price has dropped significantly.
- Over-scalping in stocks with professional market makers who have algorithms far more sophisticated than yours.
FAQ
Can market makers lose money?
Yes. If the market moves very fast in one direction (e.g., a crash), a market maker that has accumulated a lot of stock can suffer significant losses. That's why they have strict risk management and usually hedge their positions.
How do I know which stocks have market makers?
For ETFs, IDX usually announces the designated market maker. For regular stocks, you can tell from liquidity and spread — LQ45 stocks almost certainly have active market makers. You can also check the IDX website under the exchange member section.