Market Maker

Market Maker
Last modified: May 3, 2021
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market maker is a financial intermediary that stands ready to buy or sell assets by continuously quoting bid and ask prices that are accessible to other traders or registered participants of a trading platform.

A market maker is an individual or institution that buys and sells large amounts of a particular asset in order to facilitate liquidity.

In practice, a market maker, also known as a liquidity provider, is a company or individual that quotes the bid and ask price of any commodity or financial product in order to make a profit from the bid/ask spread.

A market maker is a market participant that buys and sells large amounts of a particular asset in order to facilitate liquidity and ensure the smooth running of financial markets.

An individual can be a market maker, but due to the quantity of each asset needed to enable the required volume of trading, a market maker is more commonly a large institution.

Market makers will have a certain amount of the asset (or assets) that they deal in.

By displaying a buy and sell quote and executing trades at those prices rapidly, market makers can create a straightforward way to place trades.

They are most common in stock trading but can also act in other markets.

If we take the stock market, a market maker can only sell the number of shares that they can acquire themselves.

However, they are obliged to meet the Normal Market Size (NMS), the minimum number of securities, which varies from share to share.

The meaning of market maker comes from the practice of setting market prices at levels needed for supply and demand to find balance.

When markets become volatile, market makers have to remain stable and continue to be responsible for market performance, which opens them up to a large amount of risk.

This is why market makers make their money by maintaining a spread on the assets that they enable you to trade, to compensate for the risk of buying an asset that may devalue.

How do market makers make money?

To compensate for the risk of buying an asset that may devalue, market makers maintain a spread on the assets that they enable you to trade.

For example, a market maker may offer to purchase 100 equities from you at $10 each (the ask price), and then offer to sell them to a buyer at $10.02 (the bid price).

Though this is only a $0.02 difference, in high-volume trading, the profits will soon add up.

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