17. Market-Making Strategy

Published at 1652426307.092

Definition

The market-making strategy simultaneously opens positions at the best buy and sell prices in order to seek profit through the spread. The profitability of market makers comes from the assumption that securities match in both buying and selling directions. Investors may suffer large losses if there’s only one-way order execution. It’s when they hold too many positions in the opposite direction when the stock price moves in an unfavorable direction.

In Vietnam, market makers are often misunderstood as market manipulators. Manipulators are a group of investors coordinating with each other to continuously buy and sell securities. They create artificial supply and demand, and at the same time spread false rumors. They provide false information to the public, enticing others to continuously place orders to manipulate stock prices.

Market makers essentially benefit from bid-ask spreads. It creates more liquidity in the market. In some markets, this additional liquidity is paid by the security companies or related parties. In most other cases, market makers have enough profits from the spreads.

Market Maker in Vietnam

Market makers in Vietnam can consider two key directions:

  • Participate at the best bid and ask price. The condition of execution is (sell price - purchase price) > costs. The condition is rare in the Vietnamese market. However, it happens quite often on days with high volatility.

  • Set an optimal bid and ask price based on algorithms. In this approach, the maker will increase the profit margin but the number of matches will be greatly reduced. This is an approach with a higher success rate in Vietnamese.

To implement a market-making strategy in Vietnam, investors should note the following two points:

  • With the T+1.5 regulation in the underlying security, the market maker needs to have a position available to be able to place a sell order simultaneously with a buy order. With the T+0 trading feature, it’s simpler to implement a market-making strategy in the derivatives market.

  • Market makers need an automatic, stable, high-speed order system to executive orders, and cancel orders continuously according to each market movement.