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Market Maker
A firm that provides liquidity by continuously quoting buy and sell prices for a security.
Market Maker
Market makers are the backbone of liquid markets, ensuring you can always buy or sell a stock.
How market makers work
- They continuously post bid (buy) and ask (sell) prices
- They profit from the bid-ask spread (the difference between buy and sell prices)
- They are obligated to provide liquidity even in volatile conditions
Examples
- Citadel Securities: Handles roughly 25% of all U.S. equity volume
- Virtu Financial: Major electronic market maker
- Designated Market Makers (DMMs): Firms assigned to specific stocks on the NYSE
Benefits for investors
- Tight bid-ask spreads reduce your trading costs
- Orders execute quickly because there's always a counterparty
- Continuous pricing means you can always get a quote
Risks and controversies
- Market makers may have informational advantages from seeing order flow
- Payment for order flow (PFOF): Brokers route orders to market makers who pay for the privilege
- During extreme volatility, spreads can widen dramatically even with market makers present
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Market Structure
Difficulty
Beginner
Reading Time
1 min
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Where You'll See This
This concept appears throughout stock detail pages and financial data.