Market MakerMM
A market maker is a firm that continuously quotes both a buying and a selling price, earning the spread and making it easier for others to trade.
When you click buy, someone has to sell. Very often that someone is a market maker — a firm that stands ready to trade at the prices it quotes, all day, in both directions.1 Market makers are the reason you can usually trade instantly at a narrow spread. They earn money mainly from that spread and take risk by holding inventory. This entry explains how they work, how they make money, and the common myths about them.
- Category
- Market Structure
- Reading time
- 6 min
- Also called
- Liquidity provider, Market making, Designated market maker
- Updated
A market maker in plain words
A market maker is a firm that is always ready to buy or sell a stock at the prices it publicly quotes.2 Think of a currency exchange booth at an airport: it buys euros at one price and sells them at a slightly higher price, all day long.
In markets, the buying price is the bid and the selling price is the ask. A market maker posts both. When you sell, it buys from you at the bid; when you buy, it sells to you at the ask. The difference — the spread — is its gross income on a round trip.
How market making works, step by step
Quote both sides
The market maker posts a bid and an ask, with a size at each, for example 1,000 shares bid at $49.99 and offered at $50.01.
Trade with whoever arrives
Buyers take its ask, sellers hit its bid. It does not need to know why they are trading.
Hold inventory in between
If more people sell than buy, it ends up long; if more buy, it ends up short. That inventory is its risk.
Adjust quotes
To rebalance, it shifts prices: lower quotes to attract buyers when it holds too much, higher to attract sellers when it is short.
Hedge
Large firms hedge inventory with related instruments, such as index futures or options.
Widen when risky
When volatility or uncertainty rises, market makers widen spreads or quote smaller size, which is why spreads jump around news. See Liquidity.
Worked examples
Example 1 — Earning the spread
SpreadA market maker quotes $49.99 bid / $50.01 ask. In an hour, it buys 10,000 shares from sellers at the bid and sells 10,000 to buyers at the ask.
| Bought | 10,000 × $49.99 = $499,900 |
| Sold | 10,000 × $50.01 = $500,100 |
| Gross spread income | $200 |
Two cents a share is small; market makers rely on very large volume and on managing risk well. Exchange fees and rebates also affect the result.
Example 2 — Inventory risk
InventoryBad news hits. Sellers swamp the market maker, which buys 20,000 shares at an average of $49.90 before it can lower its quotes. The price settles at $49.40.
| Inventory | Long 20,000 shares |
| Mark-to-market loss | 20,000 × $0.50 = −$10,000 |
| Hours of spread income to recover | ≈ 50 at $200 an hour |
This is why market makers widen spreads around news: one bad move can wipe out a lot of spread income.
Example 3 — What the trader pays
CostA retail trader buys 200 shares at the $50.01 ask and sells them later at the $49.99 bid, with no price change in between.
| Cost of the round trip | 200 × $0.02 = $4 |
| Received by | Whoever was on the other side — often a market maker |
The spread is the price of immediacy. Market makers provide it; traders who use market orders pay for it. See Market Order.
Where the market maker’s quotes sit
Market maker vs. other market participants
| Aspect | Main goal | Typical holding period |
|---|---|---|
| Market maker | Earn the spread; stay roughly flat | Seconds to hours |
| Retail trader | Profit from price direction | Minutes to months |
| Institutional investor | Long-term returns on large positions | Months to years |
| Broker | Execute client orders for fees | Does not take the trade itself (agency broker) |
Why market makers matter to traders
Tighter spreads
Competition between market makers narrows spreads, lowering everyone’s trading costs. See Bid-Ask Spread.
Instant execution
You can trade at almost any moment because someone is quoting both sides.
Smaller and newer assets
Exchanges often pay or oblige designated market makers to quote less-traded stocks, ETFs and tokens.
Understanding fills
Knowing that your counterparty adjusts quotes to manage risk explains why prices sometimes move just as you trade.
Advantages and disadvantages
Advantages
- Provides continuous two-sided prices and liquidity.
- Competition lowers spreads for all traders.
- Helps markets function in less-traded assets.
Disadvantages
- Spreads widen sharply when markets are stressed — exactly when liquidity is needed.
- Some market makers may step back entirely in extreme conditions.
- Payment for order flow arrangements raise conflict-of-interest questions. See Payment for Order Flow.
- In crypto, “market makers” hired by token projects may not be subject to the same rules.
Going deeper
Read as far as you need. Each level builds on the one before it.
Market makers are not betting against you
Beginner
A market maker earns most of its money from the spread and tries to stay roughly flat. It does not need your trade to lose; it needs many trades on both sides.
Designated market makers and obligations
Intermediate
Some exchanges appoint designated market makers with obligations to quote within certain spreads and sizes in return for benefits such as fee rebates. Obligations and benefits differ by exchange and product.
Adverse selection
Advanced
A market maker’s biggest risk is trading with someone who knows more — for example, buying from a seller who has just seen bad news. This adverse selection is why spreads are wider in volatile, news-driven or thinly traded assets, and why market makers react so quickly to large orders.
Common mistakes
Blaming market makers for every bad fill
Most bad fills come from wide spreads, thin books or fast markets. See Slippage.
Assuming liquidity is guaranteed
Quotes can widen or disappear in seconds during stress.
Using market orders in thin assets
Where market makers quote wide spreads, a limit order protects you. See Limit Order.
Believing “stop hunting” stories without evidence
Clusters of stops get hit because price moves through obvious levels, not necessarily by design.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A market maker stands ready to buy and sell at publicly quoted prices.
- It earns mainly from the bid-ask spread and tries to stay roughly flat.
- Holding inventory is its main risk; it adjusts and hedges quotes to manage it.
- Spreads widen when risk rises, especially around news.
- Competition between market makers lowers costs for everyone else.
Frequently asked questions
How do market makers make money?
Are market makers trading against me?
Do crypto exchanges have market makers?
Further learning
- Bid-Ask Spread
What market makers earn — and what you pay.
- Order Book
Where market makers’ quotes appear.
- Liquidity
What market makers provide, and when it disappears.
- Limit Order
How to avoid paying a wide spread.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- IG. Market maker definition (opens in a new tab) Checked .
- Investor.gov (SEC). Market Makers (glossary) (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Market Maker (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.