A long position is an investment position in which the market participant owns the quoted asset. Its opposite is a short position, where the market participant owes the quoted asset. The short position refers to the selling entity in a forward contract. ...

Long and short positions are the drivers behind supply and demand that govern the movement of financial markets. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

To develop a deep understanding of financial markets it is necessary to understand the dynamic of Market Makers and Market Takers.

Definition of a Market Maker

Market makers in a financial market are participants who at any time will quote a two-way price, that is to say, they will quote any trading partner a price at which they will buy or sell an asset (i.e. commodity, currency). This asset has to be priced against some other asset. (Three separate example: a barrel of oil is priced in US Dollars, a Swiss Franc is priced in US Dollars or conversely a US Dollar is priced in Swiss Franc).

The Market Maker’s two-way spread is made up of the price at which he is willing to buy the quoted asset and is known as the Market Maker’s bid since he is effectively bidding in the market to buy the quoted that price.

Definition of a Market Taker

A Market taker is anyone who approaches a Market Maker and deals on his two-way price. The Market Taker trades on the two-way price of the Market Maker.

Goals of the Market Maker and Market Taker

Naturally, all market participants are looking to make money from transactions, in the most general sense. A Market Taker has discretion when he trades and exercises his discretion with the objective of buying at a lower price and selling at a higher in order to realise the profit.

In this sense, the Market Taker's strategy is directional; he is trying to anticipate the direction of the market. Should he think that the asset in a particular market is going to increase in value (a "bull market") he will endeavor to buy in advance in order to sell higher later. Should the Market Taker believe that the asset will decrease in value (a "bear market") he will try and sell the asset initially, wait for the price to decrease and then buy it back. A bull market is a financial market where prices of instruments (e. ... A Bear Market is a phase in the life of a stock market or other financial market in which the value of most listed shares of stock fall consistently, or values in a financial market trend downward, as reflected by a downward movement of one or more key stock indexes...

(A sell trade entry for commodities is known as short selling. The same concept does not apply to currencies for reasons that will become apparent). In finance, short selling is selling something that one does not (yet) own. ...

The Market Maker, strictly speaking, wishes to make two-way prices that allow him to make a profit. Strictly speaking, a Market Maker positions himself neutrally, i.e. indifferently to subsequent increases or decreases in value of an asset (though as we shall see, portfolio limits curb Market Maker neutrality to market direction).

Bid-Offer Spread

The Market Maker’s price at which he is willing to sell the quoted asset is known as his Offer since this is where he is offering the market participants to buy his asset from him. The Market Maker’s Bid is the price at which the Market Taker will sell the quoted asset; the Market Maker’s Offer is the price at which the Market Taker will buy the quoted asset from him.

The two-prices that a Market Maker makes and the implied spread (i.e. difference between the price at which a Market Maker is prepared to buy or sell) are, if set efficiently, able to compensate the Market Maker for his obligation to quote two-way prices, compared the to the discretionary trade entry that a Market Taker enjoys.

Since the Spread is effectively compensation for the risk that the Market Maker assumes on himself for the obligation of making two-way markets, the size of the spread is dependent on the liquidity of the market. If there is either decent trade volumes (market terminology: ”good flow”) and / or the market is not jumpy (i.e. inclined to move large moves on little trade volume) then the Market Maker will reduce his Spread. The rationale behind this is that Market Maker profits will be made from high volume of trades multiplied by a small average spread and the Market Maker net having no position. On the other hand, if flows or volumes are limited then the same profit can be made from a small volume multiplied by a large spread. Should the market make large moves on small volume this would also compromises the Market Maker’s goal of being neutrally -positioned in an asset since he as at risk of being long (or short) an asset and finding no-one to sell (or buy) the asset back from him at a decent price after the price move. In finance a spread is the difference between the price bid and the price asked on a commodity or security. ... FLOW is a J-Pop group. ...