MARKET MAKER
Back to GlossaryDefinition
A firm that quotes bid and ask prices and stands ready to buy or sell a security.
Summary
A market maker is a financial institution or individual that acts as an intermediary in financial markets by continuously providing liquidity. They post both bid prices (what they're willing to pay to buy) and ask prices (what they're willing to sell for) for securities, and commit to trading at those prices. Market makers profit from the spread between these prices while ensuring that investors can always find someone to trade with, making markets more efficient and liquid.
Usage Context
Understanding market makers is crucial when studying market microstructure, trading mechanics, liquidity concepts, and how financial markets operate efficiently. This term is essential for comprehending bid-ask spreads, transaction costs, and market efficiency.
Common Confusions
- Confusing market makers with brokers - brokers facilitate trades for clients while market makers trade for their own account
- Thinking market makers set prices - they respond to market conditions and competition
- Believing market makers always make money - they face inventory and market risk
- Assuming all exchanges use market makers - some use different market structures
