What Does a Market Maker Do?

By Stock Research Pro • November 6th, 2009

A market maker is a broker-dealer company (typically a bank or brokerage firm) whose role is to “make the market” for a particular stock. The market maker accepts the risk associated with holding shares in inventory in order to facilitate the trading of that security; selling shares to investors looking to purchase or buying shares from those looking to sell.

What are Bid and Ask Prices?

Rather than take a commission on the transaction, the market maker profits from the difference between the bid and ask prices.

Bid Price: This is the price the market maker is willing to pay for the purchase of a stock

Ask Price: This is the price at which the market maker is willing to sell the stock

The difference between the two is known as the Bid-Ask Spread. The size of the spread will vary from one security to another, primarily due to the liquidity of the security and, of course, the rules of supply and demand apply- the greater the number of buyers, the greater the number of bids and the greater the number of sellers, the greater the number of asks there will be.

The Primary Responsibilities of Market Makers

Fulfill Transactions for Their Clients: The most important role the market maker plays is in executing orders for clients. The market maker engages other market makers in order to execute these trades at the best possible price.

Maintain Order in the Market: The market maker seeks to provide stability to the market by managing against dramatic security price fluctuations.

Manage the Firm’s Proprietary Account: Market makers seek to leverage their industry knowledge and experience to profit on the stocks for which they make a market.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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