Market Maker
Definition
A firm or individual that continuously provides buy and sell quotes for a security, profiting from the bid-ask spread while ensuring liquidity for other market participants.
Market makers are the intermediaries that make trading possible. They constantly post bid prices (what they'll buy at) and ask prices (what they'll sell at), earning the small spread between the two on each transaction. Without market makers, you'd have to find a specific counterparty willing to trade at your desired price and time.
On traditional exchanges, designated market makers (like Citadel Securities, Virtu Financial) are obligated to maintain continuous two-sided quotes. In return, they get structural advantages like faster data feeds and reduced fees. On crypto exchanges, market makers play the same role but are typically algorithmic trading firms with no formal designation.
The bid-ask spread is the market maker's compensation for providing liquidity and taking inventory risk. Liquid assets (Apple stock, Bitcoin) have penny-wide spreads because many market makers compete. Illiquid assets (small-cap stocks, obscure tokens) have wider spreads because fewer market makers participate and the risk of holding inventory is higher.
Automated Market Makers (AMMs) in DeFi (like Uniswap) replace traditional market makers with smart contracts and liquidity pools. Instead of a firm posting quotes, anyone can deposit assets into a pool and earn trading fees proportional to their share. The pricing is determined by a mathematical formula rather than a human decision.
Understanding market makers helps you trade better. Placing limit orders instead of market orders avoids paying the full spread. Trading during high-volume hours (when market makers are most active) results in tighter spreads. And recognizing that every trade has a market maker on the other side helps you understand the true cost of frequent trading.
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Frequently Asked Questions
How do market makers make money?
Market makers profit from the bid-ask spread — buying at the bid and selling at the ask. On a stock with a $100.00 bid and $100.02 ask, the market maker earns $0.02 per share on each round trip. Volume is key — small spreads multiplied by millions of trades generate significant revenue.
Do market makers manipulate prices?
Market makers can influence short-term price movements through their quoting behavior, but outright manipulation is illegal in regulated markets. In crypto (less regulated), market manipulation is more common. Competition among market makers generally keeps pricing fair in liquid markets.