Think of a market maker as the theatre stage in a bustling play—they’re always there, offering buy and sell options so trades happen smoothly. Whether you’re buying or selling, they make sure orders don’t fall through due to a lack of counterparties—maintaining market flow and confidence.
What Does a Market Maker Do?
- Quotes both bid and ask pricesand maintains an available inventory to fulfil trades on demand.
- Earns profits via the bid–ask spread, the small price difference between buy and sell rates.
- Supports market liquidity and depth, reducing volatility and facilitating swift trade execution.
Types of Market Makers
- Designated Market Makers (DMMs)have exclusive responsibilities for particular securities (e.g., on NYSE), ensuring orderly trades when liquidity is thin.
- Multiple competing market makers—like those on NASDAQ—provide continuous quotes in an open, competitive environment.
Why Market Makers Matter?
- They keep trading moving, especially during market stress when other participants might be absent.
- Their presence narrows bid–ask spreads, lowering trading costs for all participants.
- They contribute to price discovery and stability, helping underpin fair valuations.
Conclusion
Market makers are the unsung infrastructure of liquid, efficient markets—always ready to buy or sell, they underpin trade execution, market depth, and price reliability. Understanding their role offers insight into how trading stays streamlined, responsive, and fair—even during volatile periods.
FAQs
How do market makers differ from brokers?
Market makers trade using their own capital to maintain liquidity, while brokers act as intermediaries executing trades for clients. Brokers earn commission; market makers earn from the bid–ask spread.
Why is market depth important?
Depth shows the volume available at each price level, helping traders gauge liquidity and potential price support or resistance. This insight improves trade execution and risk management.
Who can become a market maker?
Typically, regulated brokerage firms or financial institutions approved by an exchange act as market makers. Individuals rarely serve as market makers due to scale and risk requirements.
Why don’t market makers disappear in volatility?
They are obligated to maintain quoted prices even during market stress, which helps prevent order floods and protects market stability.
How do market makers manage risk?
They carefully balance their inventory and may use hedging or advanced trading strategies to minimise price exposure. They also dynamically adjust their quotes based on market signals.
Can market makers exist in crypto markets?
Yes—especially across fragmented crypto exchanges, dedicated entities act as liquidity providers, maintaining consistent buy/sell quotes. This setup helps reduce slippage and narrow spreads even in 24/7 markets.
