BEING a covered warrants issuer is a big undertaking. The calculation of the price and the dispatch of quotes is carried out by a complex, automated process, but there is also significant human intervention. Every day on the trading floor, our team of 30 market-makers works with a wide range of covered warrants, giving the right market value and ensuring liquidity both when buying and selling under fast-changing conditions.
One of the most common questions investors ask is: how does a market maker generate profit? The answer might well disappoint those suspicious types who believe that providers benefit from their losses. In fact, the market maker does not earn anything when an investor loses on a listed product, just as it makes nothing when you make money.
A market maker profits through the adjustment of the dynamics of their hedge. For example, if someone is long a covered warrant in Microsoft shares and they go up in value, then the market maker has to buy more Microsoft shares so it can fulfil its obligation if the owner chooses to exercise it at expiration. It is precisely by managing this dynamic position that market makers can make money or, unfortunately for them, lose money.
Furthermore, the bid/offer spread is not lucrative because it replicates the spread of the underlying asset itself. The more liquid the underlying asset, the tighter the bid/offer spread of the covered warrant. Suspicious minds should rest easy.