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Glossary

Market Maker

A market maker is a firm or individual that continuously quotes buy and sell prices for a security, standing ready to trade and helping keep markets liquid and orderly.

What Is a Market Maker?

A market maker is a participant in a financial market that stands ready to both buy and sell a particular security at all times. Instead of waiting for a matching buyer and seller to arrive, a market maker posts two prices: a bid price, at which it will buy, and an ask price, at which it will sell. The difference between these two prices is called the spread. Market makers can be large broker-dealers, specialized trading firms, or, on some exchanges, designated participants with formal obligations to maintain quotes.

How Market Makers Earn Money

Market makers typically earn a profit from the bid-ask spread. If a market maker buys shares at the bid and sells them at the ask, the gap between those prices is its gross gain on each round trip. In practice, the profit depends on volume and on how well the firm manages the risk of holding inventory whose value can move while it waits for a buyer or seller. Many market makers hedge that exposure with other instruments and use automated systems to adjust their quotes as conditions change.

Why Market Makers Matter to Investors

Market makers help provide liquidity, which means investors can usually buy or sell shares quickly without having to find a counterparty themselves. Their quotes also tend to narrow the bid-ask spread over time, which can lower the cost of trading. Investors should be aware, however, that market makers face their own risks. During periods of stress, they may widen spreads, reduce the size of their quotes, or step back from the market, which can make trading more expensive or harder to execute.

Market Makers and Exchanges

On stock exchanges that use electronic order books, market makers often compete with other participants by posting limit orders. Some markets, particularly in certain over-the-counter market structures, rely more heavily on dealers who quote prices directly. Regulators in many countries set rules for market makers, including requirements about registration, quoting obligations, and the handling of customer orders. Because these rules and structures vary, the specific duties of a market maker depend on the venue and the security involved.

Updated October 15, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Liquidity

Liquidity is how easily an asset can be bought or sold quickly at a fair price without significantly moving its market price, and how readily it can be converted into cash.

Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer is willing to pay for a security and the lowest price a seller is willing to accept, at a given moment.

Stock Exchange

A stock exchange is a regulated marketplace where buyers and sellers trade shares of publicly listed companies and other securities, with prices set by supply and demand under published rules.

Over-the-Counter (OTC) Market

A decentralized network where securities and other financial instruments are traded directly between parties, usually through dealers, rather than on a centralized exchange with a formal listing.

Spread

A spread is the difference between two related prices, rates or yields, such as the gap between what buyers pay and what sellers accept for a security.

Order Book

An order book is a real-time, electronic list of buy and sell orders for a security, organized by price and time, showing the market's current supply and demand at each price level.

Limit Order

A limit order is an instruction to buy or sell a security only at a specified price or better, giving the investor control over the execution price but no guarantee the order will fill.

Dealer

A dealer is a firm or individual that buys and sells securities for its own account, quoting bid and ask prices and earning profit from the difference between them.