Market Maker
A firm or individual that quotes both buy and sell prices to provide liquidity in financial markets.
A market maker continuously quotes both bid and ask prices, standing ready to trade at them. It provides liquidity and earns from the spread.
A market maker is a firm or individual that continuously quotes both bid and ask prices for a financial instrument, standing ready to buy or sell at publicly quoted prices. Market makers provide liquidity to markets by ensuring there's always a counterparty available for trades, earning profit from the bid-ask spread.
How It Works
- Quotes both sides: bid (buy) and ask (sell) prices
- Must honor quotes up to a specified size
- Profits from the spread between bid and ask
- Manages inventory risk by holding positions
- Uses sophisticated algorithms for dynamic pricing
- May hedge positions in related markets
Types of Market Maker
Designated Market Maker (DMM)
Exchange-appointed market makers with obligations to maintain orderly markets in specific securities (e.g., NYSE specialists)
Electronic Market Maker
High-frequency trading firms that provide liquidity through automated systems across multiple venues
Forex Market Maker
Banks and brokers that quote currency pairs, often internalize client orders or hedge in the interbank market
Over-the-Counter Market Maker
Dealers who make markets in bonds, derivatives, or other OTC instruments
Trading Tips
Market makers profit from volume, not direction
Wider spreads during volatile markets protect market makers
Retail "market maker" brokers may trade against you (conflict of interest)
ECN/STP brokers route orders directly to market, avoiding this conflict
Market maker quotes aren't always the best price - check depth of market
Market Maker Example
Say you request a quote on GBP/JPY at 3am and still get 190.10 / 190.16 instantly. No other trader is awake, so a market maker fills you from its own book and keeps the 6-pip gap as its pay for being there.
How Traders Use Market Maker
Understand who fills you. Market makers guarantee instant fills and fixed costs, which suits small accounts, but they profit when the spread is wide, so compare their all-in cost against ECN feeds before committing size.
Related Terms
Put Your Knowledge Into Practice
Compare regulated brokers and find the best one for your trading style.