Market maker definition

A market maker is a firm or trader that quotes both a bid price and an ask price for an instrument and stands ready to trade at those prices. It supplies liquidity so other traders can enter and exit positions on demand.

The bid is the price at which the market maker will buy, and the ask is the price at which it will sell. It earns from the bid-ask spread and carries inventory risk on the positions it holds. Market makers operate in stocks, forex, options, futures, bonds, commodities, and CFDs.

A market maker is not the same as a broker or a plain dealer. A broker routes your order to the market and earns a commission without taking the other side; a dealer trades on its own account; a market maker is a dealer that commits to quoting continuous two-way prices, so it must stand ready to buy and sell at all times.

Market maker Example

A market maker quotes a stock at:

- Bid: USD 49.95 - Ask: USD 50.00

If you want to sell immediately, you sell at USD 49.95. If you want to buy immediately, you buy at USD 50.00.

The USD 0.05 difference is the spread, part of the market maker's compensation.