If you`re in the business of trading securities or other financial products, you may be familiar with the concept of market making. Essentially, a market maker is a firm or individual who helps to facilitate trading by buying and selling securities on a regular basis. This can help to create liquidity in the market, making it easier for buyers and sellers to find each other and make trades.
If you`re interested in becoming a market maker or working with one, you`ll likely need to enter into a market making agreement. This is a legal document that outlines the terms of your partnership, including how profits and losses will be divided, what types of securities you`ll be trading, and what your responsibilities will be as a market maker.
While every market making agreement will be slightly different depending on the specifics of the partnership, there are certain elements that are typically included. Here are some things to look out for when drafting or reviewing a market making agreement:
1. Roles and Responsibilities – The agreement should clearly delineate the roles and responsibilities of each party involved. This may include things like who will be responsible for executing trades, monitoring market conditions, and maintaining compliance with regulatory requirements.
2. Profit and Loss Sharing – One of the most important aspects of any market making agreement is how profits and losses will be shared. Generally, the market maker will take a cut of each trade as compensation for their services. However, the agreement should also specify how losses will be shared.
3. Securities and Asset Classes – The agreement should specify what types of securities or asset classes the market maker will be trading. For example, they may specialize in trading stocks, options, or bonds.
4. Regulatory Compliance – In order to operate as a market maker, there are certain regulations that must be followed. The agreement should specify what rules and regulations need to be adhered to, and who will be responsible for ensuring compliance.
5. Termination – Finally, the agreement should include provisions for how the partnership can be terminated if necessary. This may include things like a notice period, penalties for breaches of the agreement, or mutual termination clauses.
While it`s possible to draft a market making agreement from scratch, it can be helpful to use a template as a starting point. There are many templates available online that can be tailored to your specific needs. Just be sure to review and edit the agreement carefully before signing, to ensure that it accurately reflects your partnership and expectations. With the right market making agreement in place, you can help to create a more efficient and liquid market for everyone involved.