Friday, July 9, 2010

Broker versus Market Maker

I'm reading a book where the main character's father owns a book store and specializes in rare books.  He is also known around the world as someone who can find extremely rare books for those who want them.  I think this literary example might help some of you understand the difference between brokers and market makers.

He is acting as a broker when he helps find extremely rare books.  A buyer comes to him and says, "I want a first edition 'On the Origin of Species.'  Can you find one for me?"  He then works his network and keeps an eye out for that book.  When he finds one that someone is willing to sell, he assists in the negotiation of a price between the buyer and seller.  He takes a cut of the deal for his services as a broker.  A broker helps connect potential buyers and sellers so they can exchange goods.

His shop, with its stock of books (less rare of course), is a market maker.  He buys books that he thinks will sell at some point, puts them in his store at a higher price, and waits for buyers to purchase them.  The buyers and sellers never interact with each other, they only deal with the shop, the market maker.

1 comment:

  1. Andy, I love the analogies. You always make things so easy to understand!