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Definition: Designated Market Maker (DMM)
Designated market maker is an individual or a company that quotes the buy and sell price of a financial instrument or a commodity being traded in the financial market with an expectation of a profit on the bid-offer spread of the traded commodity or security. Designated market makers (DMMs) are called such, because they maintain order in the market, (or ensure that the market is fair) for an assigned list of companies.
NYSE has currently four DMMs including Goldman Sachs Group Inc and Knight Capital Group Inc. The position of DMMs was introduced to increase market quality and competitiveness due to the widespread of the electronic trading. Previously known as ‘specialists’ (until 2008), the DMMs are the points of contact for a firm and they provide all the relevant information, required for trading, to their assigned firms. The major change in position of DMMS from being specialists is the lack of access to inside information. The DMMs do not have the information on who buys or sells a security until the trade is made. This lack of inside information poses some amount of risk to the DMMs.
The DMMs are expected to maintain the market liquidity at a particular level. And they have to ensure that stocks (for purchase), buyers and sellers are always present in the market. They take up the role of buyers or sellers when there is any imbalance between them in the market. Generally, the prices offered by the DMMs are at par with those offered by the brokers. The DMMs are obligated to quote at the national best price for a certain period of time in the market.