Market maker

Key Takeaways

1. A market maker is a market participant, which keeps the inventory of securities and sells or buys them to gain from the difference. 

2. Generally, market makers are financial organizations.

3. The market maker creates the market for investors, while the broker buys or sells the shares from that created market.

A market maker is a market participant, which keeps the inventory of securities and sells or buys them to gain from the difference. 

Market makers play a vital role in the liquidity of the asset as they deal in the actual inventory of the asset and can make available or buy back the securities from the market. They are called dealers as well.

Market Maker Example

A market maker can be an individual or a broker. Foreign exchange dealers are also a kind of market makers, as they hold the physical currencies with them and provide investors with them during the trade.

Market maker meaning / What does it mean to be a market maker?

A dealer who is ready to buy or sell particular security like bonds or shares at the quoted price is called a market maker. Market makers are there to provide liquidity to people for investment. Market makers earn the bid ask spread as they set the quote, the bid-ask rate, at which other investors can buy from them or/and sell to them, dictating the liquidity of that asset. Generally, market makers are financial organizations.

How does a market maker make money?

Whenever a market maker is prepared to sell or buy stocks of a specific company, he or she offers a quoted price, i.e. bid and asks for a quote for that particular stock. For example, if the market maker decides to sell or purchase shares of the ABC company, he\she will provide the quoted price of the stock. Let’s assume the market maker provides a quoted price of $20.00 – $20.20, 100×500. That means the market maker will buy 100 shares of ABC company at $20.00 each and offers to sell 500 shares at $20.20. So, the other investors who are willing to purchase the shares buy at the ask quote price, i.e., $20.20 or who are eager to sell, sell at the bid price, i.e., $20.00. The earning of the market maker is the difference between the bid and ask quote, i.e., $0.20. That means the market maker earns the profit in buying and selling activity. That seems like a smaller amount. But market makers trade millions of shares, so as the number of traded shares increases, earnings also increases. Market makers inherit a high level of risk, because of the high number of units of shares they hold.

Market maker vs. broker

The market maker creates the market for investors, while the broker buys or sells the shares from that created market. Market makers create a market for investors to sell and buy securities. And from that established market broker buys or sells the shares. The broker acts as a middle man, which means the broker buys or sells shares on behalf of the investor. Market maker’s earnings are profit earned during the buying and selling activity. Broker’s earnings are the commission charged for every trade they execute.