Trading term

What is Market maker?

A market maker is a firm that continuously quotes both a price it will buy at and a price it will sell at, and stands ready to trade either side. It earns the gap between the two — the spread.

Somebody has to be willing to take the other side of your order the moment you press the button. That's the market maker's job. It posts a bid — the price it'll pay — and an offer, the price it'll sell at, and it keeps both live all day. If you sell, it buys from you at the bid. If you buy, it sells to you at the offer.

The income is the difference. Buy at $49.98, sell at $50.02, pocket four cents, do it a few million times. No view on the stock is required, and the firm doesn't want one. It wants to end the day flat, so it hedges and re-quotes constantly to shed the inventory it picks up.

What it's really being paid for is risk. Between buying from you and finding a seller, it holds a position that can move against it. That's why spreads are a cent on a big index name traded all day and much wider on a thin small-cap — the wider the price could gap before the firm gets out, the more it charges for standing there.

For example

You place a market order to sell 300 shares. A market maker's bid is $49.98 and its offer is $50.02, so you get $49.98. Twenty seconds later someone buys 300 shares at $50.02. The market maker is flat again and made $12 for the round trip.

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Why it matters to you

Market makers are why you can trade instantly instead of waiting for a matching buyer to show up. The cost of that is invisible but real: the spread is a fee you pay on every trade whether you notice it or not. It's also the reason to size up how liquid something is before you trade it — a wide spread on a thin stock can cost you more than the commission by an order of magnitude.

⚠ The market maker isn't betting against you

It's tempting to read every fill as a firm taking the opposite view of your trade. It usually isn't. Market makers are trying to be flat, not directional, and they hedge their way out within seconds. Where the conflict genuinely does live is in how your order gets routed and who paid for the right to fill it — a different question, and the one worth asking.

Frequently asked questions

How do market makers make money?

From the bid-ask spread. They buy at the lower bid and sell at the higher offer, repeatedly, in high volume. Individual profits are tiny; the volume is what makes it a business.

Are market makers required to quote?

Designated market makers take on an obligation to keep two-sided quotes live in the securities they're assigned, within limits set by the exchange. In return they get fee breaks and other privileges. Other liquidity providers quote voluntarily and can step away.

What's the difference between a market maker and a broker?

A broker acts for you and routes your order. A market maker takes the other side of it as principal, using its own capital. Some large firms do both, which is why routing disclosures exist.

Related terms

Anchored VWAPAnchored VWAP is a volume-weighted average price that starts from one candle you choose, rather than resetting at the start of each session. You anchor it to a meaningful event — an earnings gap, a major low, a breakout — and it tracks the average price everyone has paid since.Ascending triangleAn ascending triangle is a bullish continuation pattern: a flat horizontal resistance line on top, with a rising trendline of higher lows beneath it. As the higher lows squeeze price against the ceiling, pressure builds — and it usually resolves with a breakout up through the resistance.ATR (Average True Range)ATR (Average True Range) measures how much a security typically moves in a period — its volatility — as an average of recent trading ranges. It doesn't say which direction price is heading, only how far it tends to travel, which makes it a core tool for stop-losses and position size.Bearish engulfingA bearish engulfing is a two-candle reversal pattern in which an up candle is followed by a down candle whose body completely covers it. The second candle opens above the previous close and closes below the previous open.
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