Financial Word of the Day: Market Maker

Larry Jones
Sep 1
3 min read

Updated: Sep 24

Definition of Market Maker

A market maker is a firm (or algorithm) that constantly offers to buy and sell a stock, ETF, or option—posting two prices (a bid and an ask)—so there’s always someone on the other side of your trade. They earn a small profit from the spread between those two prices and keep the market moving.

Why It Matters

Liquidity is the oil in the financial engine. Without market makers, you’d click “buy” and hear crickets. With them, you get faster fills, tighter spreads, and more predictable pricing—especially in busy names or during choppy moments.

How It Works (30-second tour)

Quotes both sides: Posts a bid (buy price) and an ask (sell price) at the same time.
Earns the spread: If they buy at $10.00 and sell at $10.02, that $0.02 is their gross edge before costs.
Updates constantly: Prices adjust in milliseconds as news and orders hit.
Competes with others: Multiple market makers battle to offer the best prices. Competition = tighter spreads for you.

Simple Example

You place a market order to buy 200 shares of XYZ. A market maker is quoting $24.98 x $25.00 (bid x ask). Your order hits the $25.00 ask and fills immediately. The market maker might have just bought shares at $24.98 from a seller and sold to you at $25.00, pocketing $0.02 per share (before risks, fees, and hedging).

Where You’ll See It in the Wild

Broker screens: Level I shows the best bid/ask; Level II shows depth—lots of market makers and ECNs stacking quotes.
Options chains: Market makers keep the quotes alive even in thinly traded strikes.
Volatile news: Spreads can widen when risk spikes; that’s the market maker pricing uncertainty.

Quick Math

If a market maker turns a $0.01–$0.03 spread thousands of times a day across many symbols, the tiny edges add up—provided they manage inventory and risk well.

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Pro Tips (For Everyday Investors)

Tight spreads are your friend. Look for names with penny-wide or near-penny spreads when possible.
Use limit orders. Don’t donate to the spread unnecessarily; set your price and let the market maker come to you.
Mind the clock. Spreads are often wider right at the open and near the close (and around major news).
For options: Wider spreads are normal. Work your limit toward the mid price instead of crossing the full ask.

Watch-Outs

Illiquid tickers = wide spreads. That “cheap” stock can be expensive to trade.
Large orders can move the price. Break them up or use limit and time-in-force settings to control slippage.
Fast markets change quotes. What you see may not be what you get if prices are racing.

Related Terms

Bid, Ask, Spread, Liquidity, ECN, Order Book, Limit Order, Slippage

10-Second Takeaway

Market makers are the quiet pros keeping your trades executable. Respect the spread, use limits, and you’ll keep more dollars in your pocket.

Your Next Step (Actionable)

Pick one ticker you trade often. Check today’s average bid-ask spread and commit to using limit orders near the mid for your next three trades. Track how much you save. Small wins compound—like interest with better manners.