Trading Lessons

Understanding the Role of the Market Maker

Level II
Written by Noah Hochman

Market makers are responsible for continuity and liquidity in the market. It is usually an individual for a firm that quotes both a buy and a sell price for stocks that they currently have in their inventory. They hope to make a profit on the spread, (the difference between the bid and offer).

Market makers are responsible for continuity and liquidity in the market. It is usually an individual for a firm that quotes both a buy and a sell price for stocks that they currently have in their inventory. They hope to make a profit on the spread, (the difference between the bid and offer).

Market makers as a whole are responsible for sustaining a fair an orderly market but work independently from one another. They have access to basically the same information as the most day traders with a key exception, they already have order flow and may have an better idea of which way the market in that stock is going.

Market makers compete for business ( order flow) and thereby earn more spreads creating more liquidity making it easier for them to trade. In essence Market makers are trying provide good order fills for their customers while making money for themselves via the spread.

Noah Hochman

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