How markets work
Market maker
A firm that continuously quotes both a buy and a sell price, so there is always someone to trade with.
How it works
Market makers provide liquidity. They stand ready to buy from sellers and sell to buyers, earning the spread between the two as compensation for the risk of holding inventory that moves against them.
Their presence is why you can sell a large listed share instantly at a fair price. In securities without one, you have to wait for a natural counterparty, which is what illiquidity actually feels like.
Where it misleads people
Market makers are not obliged to hold prices steady in a crisis. When volatility spikes, they widen spreads and reduce size, so liquidity thins out precisely when everyone wants it.
Related terms
- LiquidityHow quickly you can turn something into cash at a fair price, without moving the price against yourself.
- Bid-ask spreadThe gap between the highest price anyone will pay and the lowest price anyone will accept.
- Payment for order flowA broker being paid by a trading firm for the right to execute its customers’ orders.
- Order bookThe live list of every outstanding buy and sell order, arranged by price.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.