To function efficiently and facilitate trading, many niches depend on market making, the practice of quoting two-sided prices. By providing liquidity, market makers ensure smooth and efficient price discovery.
In recent decades, the advent of automated trading technology has revolutionised trading, with algorithmic trading now dominating market activity. This shift has presented both opportunities and challenges for market makers, and that’s on top of the ongoing debate around market making itself.
Firms increasingly rely on Chronicle Software’s high-performance, event-driven framework to build and maintain competitive market-making infrastructure. Tools like Chronicle FIX, Chronicle Queue and Chronicle Services are engineered to support the ultra-low latency demands of market makers — from data ingestion and order management to seamless system interoperability and real-time decision-making.
The Efficient Market Hypothesis and the Role of Market Makers
At its core, a market is simply a mechanism that facilitates the exchange of assets between buyers and sellers. The dynamics of supply and demand continuously shape price formation, with market participants reacting to new information and adjusting their trading decisions accordingly.
However, there are various interpretations of the EMH. Weak-form efficiency suggests that current prices already incorporate past price information, making impactful signal generation and extraction extremely challenging. Semi-strong form efficiency extends this to include all publicly available information, such as financial statements and news reports. Strong-form efficiency, the most extreme version, implies that prices reflect even private information, making insider trading impossible.
While academics debate the degree of efficiency across different markets, there’s broad agreement that well-functioning markets require liquidity providers. Market makers serve as these crucial liquidity providers, standing ready to buy or sell financial instruments at publicly quoted prices. By maintaining a continuous presence in the market, they ensure that other participants can execute trades promptly and at fair prices, even during periods of market stress or low trading volumes.
The Shift to Electronic Trading and Algorithmic Market Making
Traditional trading floors with frantic hand signals and paper tickets have long given way to fully electronic platforms. Major institutions like the London Stock Exchange and Deutsche Börse have for many years operated entirely via electronic systems, enabling unprecedented speed and efficiency. Estimates project that the market for algorithmic trading will grow from $2.53 billion in 2025 to USD $4.06 billion by 2032.
However, many investors and regulators have expressed concerns about the potential for algorithmic trading to exacerbate market volatility or create unfair advantages. In the aftermath of the 2008 financial crisis, regulators introduced frameworks like MIFIDII in Europe. The UK’s Financial Conduct Authority established the Senior Managers Regime, placing a greater emphasis on individual accountability. Similarly, Australia introduced its Financial Accountability Regime.
While there isn’t a single direct equivalent to these regulations in the US, the Dodd-Frank Act and subsequent regulations from bodies like the Securities and Exchange Commission and Financial Industry Regulatory Authority have increased scrutiny on financial institutions and the accountability of their senior personnel.
Challenges for Market Makers and Financial Institutions
With the public perception of financial institutions and regulatory requirements changing, market makers face a number of challenges.
Building trust and credibility was already the foundation of business in the past, but it’s even more important nowadays, as brokerages need to give a face to automated workflows.
To fulfill regulatory requirements and show the performance metrics securing future collaborations in the Broker Wheel, firms have to strike a balance between academic rigor, real-world testing and hiring strategies.
As Peter Lawrey, CEO of Chronicle Software, observes: “The most successful market makers combine cutting-edge technology with deep market understanding. Their algorithms may execute trades, but human expertise shapes the strategies and risk parameters that guide those algorithms.”
Understanding Market Making: A Closer Look
Market makers perform several critical functions that maintain market integrity:
First, they provide liquidity by consistently offering to buy and sell assets, ensuring that other market participants can execute trades without significant delays or price slippage.
Second, they help ensure fair pricing by narrowing the bid-ask spread – the difference between the price at which they’re willing to buy (bid) and sell (ask) an asset. Tighter spreads mean more efficient markets and lower transaction costs for all participants.
Many exchanges incentivize this behavior through fee rebate structures, where market makers receive financial benefits for providing consistent liquidity. These incentives are particularly important in less liquid markets where natural buying and selling interest might be sporadic.
Despite not being part of the public perception, market makers also stand behind the success of IPOs. By committing to provide liquidity for these securities, market makers help establish orderly trading and price discovery during periods when market participants are still determining appropriate valuations.
Overcoming Technical Challenges in Market Making
Building effective market-making infrastructure presents significant technical hurdles.
Resource strain remains a primary concern. Developing robust systems capable of processing market data, generating quotes, managing risk and executing trades with sub-millisecond latency requires substantial investment in both hardware and software engineering talent.
Integration complexity presents another obstacle. Market makers must seamlessly merge new algorithms and trading strategies into existing infrastructure without disrupting ongoing operations.
The fast-paced innovation cycle in financial technology means market makers must constantly evaluate and implement new approaches to remain competitive. Standing still is not an option.
Perhaps most critically, the latency arms race continues to intensify. In markets where price advantages may exist for only microseconds, only firms with the lowest-latency infrastructure can consistently capture opportunities.
Chronicle Software provides a unique advantage in this environment by enabling firms to implement sophisticated business logic while also reducing development time. By leveraging Chronicle’s field-tested components, market makers can focus on developing proprietary strategies rather than building infrastructure, accelerating time-to-market and capturing fleeting market opportunities.
Solutions With Chronicle Software
Chronicle Software has emerged as a key enabler for firms seeking to build or enhance their market-making capabilities without starting from scratch.
Chronicle’s proven platforms provide the foundation for high-performance, low-latency market making across asset classes. These solutions address the technical challenges while allowing firms to focus on developing their proprietary trading logic and risk management approaches.
As an example, Chronicle FIX provides connectivity solutions that enable low-latency trade execution and market data streaming, critical components for any market-making operation.
Jeff Gomberg, Head of Electronic Trading at StoneX, affirms: “Working with Chronicle has been a hugely positive experience for StoneX, in terms of their software, their financial trading software expertise and their highly flexible, collaborative approach to delivering outstanding results.”
The Future: Chronicle Software’s Innovations in Market Making
At Chronicle we continue to advance market-making technology through solutions like Chronicle’s Cortex integration, which enables efficient electronic trading across multiple asset classes.
Soon, brokers will also benefit from Chronicle’s Domain Accelerators that will further enhance market-making capabilities through improved price generation, order management and risk calculation tools.
Conclusion
As financial markets evolve, the importance of effective market making and liquidity provision only grows. Regulatory requirements become more stringent, trading volumes increase and market participants demand ever-greater efficiency.
Chronicle Software stands at the forefront of this evolution, empowering financial institutions with the high-performance infrastructure needed to secure a place at the table. By combining technical excellence with deep domain expertise, Chronicle enables market makers to focus on what matters most: developing innovative strategies that provide liquidity and contribute to efficient, fair markets.
To learn more about Chronicle’s solutions, reach out to our expert team.
