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The Market Makers.

October 8, 2011

 

Any product or service  requires a Physical space or a place to be bought or to be sold.All the negotiation process which includes exchange of goods & services with each other in case of Barter economy or exchange of Money with goods & services in case of Monetary economy , Bargaining process, Final sale happens in this Physical place. This Place in known as The Market .In short Market can be defined as a place where Goods and services are Bought by the buyers and sold by the sellers.Market is a Place where the Buyers and Sellers interact.It may be a shop , a mall, a stock exchange or a computer where the deal is done.

The Market Makers are those persons who create a demand for a product. By creating a demand for a product the market maker is able to attract customers for that product . Now he has to sell that product to the customers.For that both the Sellers and the customers requires a physical space or place where they can sell and by the Product. This place where the whole Buying and Selling process takes place is the Market . In short we can say the Market Makers create a Market for the Product i.e they create both the demand and supply of a Product.

The Important fact is that The Market Maker may not necessarily be the direct seller of the Product. He may not be available in the Market directly to the customers. The Market Makers just helps to create a demand and Supply for a product , tangible or intangible with the help of  the Marketing tools like analysis , planning and control and through distribution channels. He may be the Business man, a manager or a group of people who are given an assignment to create a demand for a product and how to supply it in the market or create a market for the product.For example the role of the Market Maker assumes importance when the first car was invented. The task of the market maker is to create a demand for this car i.e he has create a market for the car. He has to create a process where the customers are attracted for the cars and are ready to pay the given price for the car.For that he uses all the marketing tools available at that time in order to create a market for the cars and make maximum return on the investment (R.O.I.).He also has to make sure that the the car is available to the customer on his demand in the minimum possible time. He has to create various channels of distribution for the efficient supply of these cars in the market i.e shops , showrooms, dealers, agents , sub agents, sales and service centers and so on.

The History of the Market and the Market Makers.

One of the most important advances needed for the creation of a market system took place sometime between 12000 and 10000 B.C. with the advent of specialization (Division of labor) and the start of the Neolithic Age. The birth of small communities of people changed the mindset of the Neolithic men to shift from tribe hunting and food gathering to become expert in one task like  hunting, gathering, cooking, tool making, shelter making, or clothes making . As  methods of agriculture improved , the first towns and cities were seen.Dependable food supplies allowed people to build permanent houses and settle in one area. As settlements increased in size, new forms of society such as religious centers, courts, and marketplaces developed. The advent of towns produced further specialization, creating jobs in tool making, pottery making, carpentry, wool making, tool making, and masonry, among others. The specialist created items faster and of a better quality than if each family made its own, increasing standards of living.

The earliest signs of Market system at work could be seen in the form of Barter system during 6000 B.C. The development of Money Market system may date from around 3000 BC in Mesopotamia when Shekel were uses as the form of money. The Lydians were first people to use Gold and Silver coins in 600-650 B.C. The Paper money or the Banknotes were used in China during the Song Dynasty in the 7th century and were known as Jiaozuo. Banknotes were used in Europe in 1661 by Stockholms Banco.

During 1100 b.c. feudalism was prevalent all over the world in different forms.It was a world of kings and lords, vassals and serfs, kingdoms and manors. Long distance trade was expanding and new worlds of foreign spices, oriental treasures, and luxurious silks were discovered. Three hundred and fifty years later, after weathering a Black Death and the Hundred Years War, Europe emerged by expanding trade to new levels and building the foundation for the start of the competitive market economy we know today.

With a population spurt starting around 1470, cities, markets, and the volume of trade grew. Banking, initially started by Ancient Mesopotamians, grew to new heights and complexities, the guild system expanded, and the idea that a business was an impersonal entity, with a separate identity from its owner, took hold. Silver imports from the new world drove expanded trade and bookkeepers created standardized principles for keeping track of a firm’s accounts based on Luca Pacioli’s advances. Early entrepreneurs, called merchants and explorers, began to raise capital, take risks, and stimulate economic growth. Capitalism had begun.

It began with much resistance, however. The idea of gain was shunned and shamed. The practice of usury, charging interest on loans, was banned by the Church. Jobs were assigned by tradition and caste. Innovation was stifled and efficiency was forcefully put down, punishable by death. In sixteenth-century England, when mass production in the weaving industry first came about, the guildsmen protested.

With the advent of a complex marketplace and capitalists, the battle of ideas raged to explain the sources of wealth and to explain the workings of market. Between approximately 1550 and 1800, a philosophy called mercantilism ( hoarding of Gold and treasure as the source of nation’s wealth) was at the forefront.Monopolies and tariffs were promoted and competition and trade were discouraged. However during the 18th century in the Europe new school of thoughts promoting commerce and not mercantilism came up. Adam Smith further backed this idea and was the first to capture and explain the essence of the marketplace. He did so in his famous 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations, slaying the mercantilist dragon in the process. Within, Smith outlines certain laws of the market, that are worthy of mention.

Smith explains that self-interest acts as a guiding force toward the work society desires. As Smith notes in Wealth, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest." While one would naturally assume that everyone following only his or her self-interest would not create a very good society, there is another force that prevents selfish individuals from exploiting the marketplace. That regulator is competition.

This principle can be explained best with the following excerpt from The Worldly Philosophers.

A man who permits his self-interest to run away with him will find that competitors have slipped in to take his trade away; if he charges too much for his wares or if he refuses to pay as much as everybody else for his workers, he will find himself without buyers in the one case and without employees in the other.

Following Smith there were many other economists, ideologists, sociologists, and philosophers that pontificated on the workings of the increasingly complex marketplace. Ricardo outlined the all important principles of trade while Malthus predicted overpopulation and doom. Mill contemplated on liberalism while Bentham promoted utilitarianism. Marx painted a bleak picture of forced labor and surplus value while Keynes later showed there sometimes was reason for an active government.

By the of Smith’s death in 1790, the nascent Industrial Revolution had already reared its head. The effects of the Renaissance, the humanist movement, and the new focus on science and empiricism would translate into the launch of movement that would impact the world as none before it had. It was this revolution, often harsh and cruel, that prompted thoughts of communism, created robber barons and titans, and led to the development of the innovations, technology, and standards of living we have . The colonization of Asia, Africa, America and Australia by the European countries led by England also contributed to the Industrial revolution and the growth of Capitalism. These colonies were major supplier in raw materials, Gold&Silver and Cheap Labor to England during the Industrial revolution and also became its tapped market for its finished goods. No doubt this market played a key role towards the Prosperity and economic development of the European countries for more than 300 years and was the major cause of the two world wars( A bone with with many dogs to fight for).

The growth of the Financial market ( Stock&Shares, Commodity & Currency, Gold & Silver) especially during the  the 20th century brought new breed of Market Makers . From here we can define the Market Makers as a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place an order to sell your thousand shares of Disney, the market maker will actually purchase the stock from you, even if he doesn’t have a seller lined up. In doing so, they are literally "making a market" for the stock. You probably take for granted that you can buy or sell a stock at a moment’s notice. Place an order with your broker, and within seconds, it is executed. Have you ever stopped to wonder how this is possible? Whenever an investment is bought or sold, there must be someone on the other end of the transaction. If you wanted to buy 1,000 shares of Disney, you must find a willing seller, and visa versa. It’s very unlikely you are always going to find someone who is interested in buying or selling the exact number of shares of the same company at the exact same time. This begs the question, how is it that you can buy or sell anytime? This is where a market maker comes in.

A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.

The Internet as well as increased trade and flow of capital would create profound change in business. The markets would go dot com crazy and then crash and burn. We’ve gone from hunting, gathering, bartering, and grunting to specialization, miniaturization, internationalization, mass-production, and six sigma—all due to the invisible hand, innovation, and industry. And such is the history of the market system and the Market Makers.

 

Suggested Readings

Zero to One Million

By Ryan.P.M.Allis
September 18, 2003

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