Definition
A market maker stands ready to buy and sell an asset under its quoting strategy or contractual obligations. By providing two-sided interest, it can help other participants transact and improve market depth. The role is more sustained than being the maker on one individual trade, which any eligible resting order can accomplish.
How It Works
A simplified maker might quote a bid of 99 and an ask of 101. Buying at 99 and later selling at 101 would capture a gross spread of 2 before costs, but the two executions are not guaranteed to occur together. Quotes are adjusted as prices, inventory, and competing liquidity change.
Key Considerations
A maker can lose when its inventory moves adversely or informed traders trade against stale quotes. Hedging, capital costs, and fees reduce any spread income. Market making does not mean controlling the market price or guaranteeing liquidity in all conditions. Formal programs may impose quote-size or uptime requirements, while ordinary activity may have no such contractual obligation.