Market Maker

For markets to work smoothly, buyers need to be able to find sellers and vice versa. A market maker fills this role by always being ready to trade. It posts a bid price at which it will buy and an ask price at which it will sell, and keeps these quotes available throughout trading hours.

For example, a market maker in a share might quote a bid of 19.98 and an ask of 20.02. Investors can sell to it at 19.98 or buy from it at 20.02 at any time, even if no other investors are trading at that moment.

Market makers earn money from the bid-ask spread, buying at the lower price and selling at the higher one, across many trades. They take on the risk that prices move while they hold securities.

By providing constant buying and selling, market makers improve liquidity and keep spreads narrower. Stock exchanges often have formal arrangements with market makers, who may receive benefits in return for committing to keep quotes active.