Market Maker

A Market Maker is a firm or individual that stands ready to buy and sell a particular security at publicly quoted prices, ensuring continuous liquidity in the market.

How Market Makers Work:

1. Continuously post bid and ask prices
2. Buy from sellers at the bid price
3. Sell to buyers at the ask price
4. Profit from the bid-ask spread

Example: Market Maker quotes for Stock XYZ:

• Bid: $49.95 (willing to buy)
• Ask: $50.05 (willing to sell)
• Spread: $0.10 (their profit per share)

Types of Market Makers:

Type	Market	Examples
Designated Market Makers (DMM)	NYSE	Citadel Securities, GTS
NASDAQ Market Makers	NASDAQ	Virtu, Two Sigma
OTC Market Makers	Pink Sheets	Various broker-dealers
ETF Market Makers	ETF	Jane Street, Flow Traders

Obligations:

• Maintain continuous two-sided quotes
• Trade at quoted prices (up to certain size)
• Ensure orderly markets
• Meet minimum quote requirements

How They Make Money:

1. Spread Capture: Buy low, sell high repeatedly
2. Rebates: Exchanges pay for providing liquidity
3. Information Advantage: See order flow
4. Inventory Management: Hedge positions

Benefits to Investors:

• Can always buy or sell
• Tighter bid-ask spreads
• More stable prices
• Price discovery assistance

Potential Concerns:

• Information asymmetry
• Payment for order flow (PFOF)
• Front-running concerns
• Conflicts of interest

Market Making vs Investing: Market makers are not betting on direction—they profit from trading activity regardless of market direction.