market maker

A market maker is a financial institution or individual that facilitates trading in financial

instruments by continuously quoting buy and sell prices for a particular asset. Market makers
play a crucial role in maintaining liquidity and orderly trading in financial markets. Here are
some key characteristics and functions of market makers:

1. Continuous Quoting: Market makers provide bid and ask prices for a specific asset
throughout the trading day. The bid price is the price at which they are willing to buy
the asset, while the ask (or offer) price is the price at which they are willing to sell the
asset. The difference between the bid and ask prices is known as the spread.
2. Liquidity Provision: By quoting bid and ask prices, market makers ensure that there
is always a counterparty available for traders looking to buy or sell the asset. This
helps maintain liquidity in the market and reduces the impact of large buy or sell
orders on the asset's price.
3. Price Stabilization: Market makers help stabilize prices by adjusting their quotes in
response to changes in supply and demand. They may widen the spread during periods
of higher volatility or uncertainty to manage their own risk exposure.
4. Risk Management: Market makers manage their inventory of assets by continuously
adjusting their positions based on market conditions. They may use various hedging
strategies to mitigate the risk associated with holding large positions in a particular
asset.
5. Profiting from the Spread: Market makers earn profits from the spread between the
bid and ask prices. They aim to buy at a lower price and sell at a higher price,
capturing the difference as profit. However, they must balance the need to make
profits with their obligation to maintain fair and orderly markets.
6. Meeting Regulatory Requirements: In many jurisdictions, market makers are subject
to regulatory requirements aimed at ensuring fair and transparent trading practices.
These regulations may include obligations related to quoting minimum sizes,
maintaining adequate capital reserves, and adhering to best execution principles.

Market makers are typically active in liquid markets for stocks, bonds, currencies, and
derivatives. They may operate as specialized market-making firms, brokerage firms, or within
larger financial institutions such as investment banks. Overall, market makers play a vital role
in ensuring the smooth functioning of financial markets by facilitating efficient price
discovery and execution of trades.