Market maker
A market maker is a broker-dealer that stands ready to buy and sell a security at publicly quoted prices, trading from its own inventory. Market makers provide liquidity and earn the spread between their bid and ask prices.
A market maker is a firm — technically a broker-dealer acting in a principal (dealer) capacity — that commits to continuously quoting two prices for a security: a bid, the price at which it will buy, and an ask (or offer), the price at which it will sell. By always standing on both sides of the market, the firm "makes a market" in that security.
Market makers trade from their own inventory and take on real risk to do it. Their compensation is the spread — the difference between the bid and the ask. If a market maker quotes a stock at 20.00 bid, 20.05 ask, it aims to buy shares at $20.00 and resell them at $20.05, earning five cents per share. Competition among multiple market makers in the same security tends to narrow spreads, which lowers trading costs for everyone.
Market makers matter because they supply liquidity: an investor who wants to sell doesn't have to wait for another investor who wants to buy — the market maker takes the other side. This is central to how over-the-counter markets like Nasdaq operate, where many competing market makers quote each stock. On the NYSE, a similar liquidity role is played by the designated market maker (DMM) assigned to each listed stock.
The SIE, Series 65, and Series 66 exams all test market makers as part of the roles in the securities industry: know that they act as principals (dealers), earn the spread rather than commissions, and are the key liquidity providers in the secondary market.
Key takeaways
- A market maker continuously quotes both a bid (buy) price and an ask (sell) price for a security.
- Market makers trade as principals from their own inventory and earn the bid-ask spread instead of a commission.
- They provide liquidity, letting investors trade without waiting for a matching counterparty.
- Nasdaq relies on competing market makers, while each NYSE-listed stock has a designated market maker (DMM).