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What is a Market Maker?

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Used in a sentence

The Daily Ledger · Markets

With no natural buyer at that moment, the market maker filled the order from its own inventory.

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Overview

A market maker is a firm that stands ready to buy or sell a particular stock at all times. It posts two prices at once, a lower one at which it buys and a higher one at which it sells. It honors both all day. Sell to it and your shares go into its own inventory; buy and they come out of it. What it sells is immediacy: you trade the moment you choose, instead of waiting for another investor to take the other side.
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Overview

A market maker is the firm on the other side of your trade, whichever side that is. It quotes a buying price and a selling price at the same time, pockets the sliver between them, and repeats that thousands of times a day. It holds no opinion on the stock. You clicked sell because you expect a drop; it bought your shares because somebody else will click buy soon enough. It is less a rival than a tollbooth with inventory. 😎

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Detail

A market maker is a firm that stands ready to buy or sell a stock at any moment, trading out of its own inventory. All day it posts two prices, a lower one at which it buys and a higher one at which it sells. Sell 200 shares mid-morning and you do not wait for a buyer. The maker buys them, then waits in your place, selling them on when a buyer arrives and keeping the few cents between its two prices. That gap is the bid-ask spread, and collecting it thousands of times a day is the business. The firm is not betting that the stock will rise. It wants to hold as little as it can for as short a time as it can, because shares sitting in its inventory can lose value before it sells them. Its two prices are how it controls that: when sellers keep arriving and shares pile up, it lowers both until buyers step in, and when its inventory runs low it raises both to slow the selling down. In a fast market those shares are riskier to hold, so it widens the gap between its two prices, just when everyone wants to trade at once. When you click sell in a brokerage app, the maker on the other side is usually one your broker chose, and it paid your broker for the order, an arrangement called payment for order flow.
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Detail

A market maker is the firm that stands on the other side of your trades, buying or selling a given stock at any moment, at the two prices it posts, out of its own inventory. How close together it sets those prices depends on how fast it can pass your shares along. In a giant stock the gap between its buy price and its sell price is barely there, and it will trade a large parcel of shares at it, because the next buyer is seconds away. In a tiny stock the gap yawns and the maker may quote only a sliver of that size, because it may sit on your shares for a long stretch before anyone wants them. When panic hits, watch the quotes. The gap can widen many times over in seconds, and the number of shares the maker will take shrinks with it. The maker has not turned villain: buying every share of a falling stock is how a maker goes broke, so it charges more to catch them. Its product was always immediacy at a price. On a calm day that price is a rounding error you never notice. On the day the crowd runs for the exit at once, the fee goes up, and that is exactly the day you meet it. 😎

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Analogy

A used-car dealer buys your car the day you drive it in. You could wait weeks for a private buyer; the dealer pays now, parks it on the lot, and later sells it for more than it paid. The margin pays for the wait and the risk that prices slip while the car sits. When the lot fills up with hatchbacks, the dealer offers less for the next one and cuts its stickers until they sell. A market maker runs the same trade in shares. It buys from anyone who wants out, sells to anyone who wants in, keeps the gap between its two prices, and moves both prices to stop inventory piling up.
Deepest level reached.
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Analogy

A bookie takes bets on both teams and does not care who wins. What he cares about is balance: when too much money lands on one side, he moves the odds until the other side looks attractive and the money evens out, leaving his cut safe whatever the score. A market maker is the same operation in a stock. It quotes a buy price and a sell price, keeps the sliver between them, and when sellers pile in it drops both prices until buyers take the other side. It is not predicting the game; it is balancing the book, and much of the price movement you watch is that balancing. 😎
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

A market maker is a broker-dealer that continuously quotes both a bid and an ask price in a security and stands ready to trade at those prices for its own account, supplying liquidity to the market. Market makers profit primarily from the bid-ask spread while bearing the inventory risk and adverse-selection risk of holding positions. On many exchanges, designated market makers assume formal quoting obligations, such as maintaining two-sided quotes for a minimum share of the trading day and within specified spread limits. In United States equities, a small number of wholesale market makers execute a large share of the retail order flow routed to them by brokerage firms. Quoted prices adjust continuously with order flow, volatility and the maker's inventory position, and market-making activity is regulated.

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