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Market Makers & Relationships with Exchanges, Brokers & Data Providers

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Written By
Dan Buckley
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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Updated
Mar 17, 2024

Can a market maker own an exchange, broker, or data provider?

There are definite advantages for a market maker to own an exchange, data provider, or broker.

But there are important considerations and potential conflicts of interest to understand.

 

Advantages of Market Maker Integration with Exchanges, Brokers & Data Providers

Information

A market maker owning any of these entities would provide it with direct access to a wealth of valuable market data:

  • Order flow – Real-time insights into what traders are buying and selling, at what prices and volumes.
  • Depth of market – Visibility into the volume of buy and sell interest at different price levels, which could show potential imbalances/skew.
  • News and sentiment – Access to market-moving information before it becomes public knowledge

Influence over Market Structure

Ownership could allow a market maker to shape the trading environment to their advantage, such as:

  • Setting fee structures
  • Designing order matching systems*
  • Potentially influencing rules that benefit a market-making style of trading.

Reduced Costs

Bypassing external data providers and potentially using the exchange infrastructure for trading would lower operational costs for the market maker.

*An order matching system is a digital platform used by exchanges to pair buy and sell orders from traders based on price and time priority. It facilitates efficient and fair market transactions.

 

Conflicts of Interest and Regulatory Concerns

  • Fair Competition – If a market maker owns an exchange or data provider, they have an unfair advantage over other market participants. This raises concerns about potential manipulation and conflicts of interest.
  • Regulatory Scrutiny – Regulators are vigilant about such consolidation of power in the markets. Any ownership structure like this would be subject to scrutiny and likely involve strict regulations to prevent abuse.
  • Customer Trust – Certain traders/market participants may be wary of trading on an exchange owned by a known market maker, fearing that the “house” will always have an edge. This affects perception and could reduce the attractiveness of the exchange in the long run.

 

Real-World Considerations

Due to conflicts of interest and regulatory concerns, outright ownership of these entities by market makers is relatively rare.

There are instances where large financial institutions with market-making arms may have ownership stakes in exchanges or data providers, but these are typically minority stakes and often come with strict regulations to help keep a level playing field.

While owning an exchange, data provider, or broker would provide market makers with informational and potential operational advantages, the ethical and regulatory implications would make it complex and highly scrutinized situation.