Market Maker

A market maker is a firm or individual that stands ready to buy and sell a particular security on a regular and continuous basis at publicly quoted prices. By always providing a bid (price to buy) and ask (price to sell), market makers ensure there's always someone available to trade with, providing essential liquidity to financial markets. Market makers profit from the bid-ask spread - the difference between what they pay to buy and receive when they sell. For a stock with a $49.95 bid and $50.00 ask, the market maker earns $0.05 per share for facilitating the transaction. This spread compensates them for the risk of holding inventory and providing liquidity. The role of market makers is crucial for market functioning. Without them, investors would need to find individual counterparties for every trade, which could take significant time and result in much worse prices. Market makers smooth trading, reduce price gaps, and enable the rapid execution most investors take for granted. On the NASDAQ, multiple market makers compete for order flow in each stock, with competition keeping spreads tight. The NYSE uses a hybrid system with designated market makers (DMMs) who have special obligations and privileges for assigned securities. Electronic market making by high-frequency trading firms has become increasingly important in modern markets. Market makers face various risks. Inventory risk arises from holding securities whose prices might move against them. Adverse selection risk comes from trading against better-informed counterparties. During volatile periods, market makers may widen spreads or reduce quoting to manage these risks. Understanding market making helps investors appreciate the infrastructure that enables trading. When you place an order and it executes instantly, a market maker likely stood on the other side. The spread you pay is the cost of this liquidity service - a small price for the convenience of immediate execution.