The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses

Market Makers vs. Specialists

The specialist must also set the opening price for the stock each morning, which can differ from the previous day's closing price based on after-hours news and events. The specialist determines the correct market price based on supply and demand.

Market making is the quoting of both a buy- and a sell-price in a financial instrument held in inventory, in the hope of making a profit on the bid-ask spread.

In Market making, transactions are events, positions in space and time. Every trade requires a buyer and a seller, ergo a buyer and seller of the same instrument occupying the same position in space and time.

Many instruments exist and there are lots of spaces and times. The chances of somebody willing to buy a sheep and somebody else selling it on Regent Street at midday (prime sheeping time) are low. Markets (economics) try to solve this problem by providing a place, sometimes physical though more often abstract, where parties can transact. Thus, markets put parties interested in exchanging similar things in similar places to increase the probability of a transaction.

This still leaves the problem of time – the buyer wants to buy that sheep at midday but the seller can’t get into Regent Street until 2 Ppm. An enlightened individual seeing that buyer sheepless every morning and noticing the abundance of sheep in the afternoon would note that he might be able to sell the buyer a sheep for a bit more than the gentleman later in the day would charge him.

Of course, this would call for carrying an inventory of sheep. But supposing there are enough buyers and sellers and the prices of sheep aren’t changing too much it is reasonable to assume the risk of the inventory dying in exchange for the spread.

Market making is the process by which broker-dealers offer liquidity in a particular market. Broker dealers take the risk and pledge to hold a particular number of shares in a security. The market makers show their quotes and compete among themselves for the customers’ orders.