Market maker

A market maker quotes two prices for a share, bond, ETF or other security at the same time: a bid at which it will buy and a slightly higher ask at which it will sell. By trading from its own inventory, it lets investors deal even when no natural buyer or seller happens to be present. It makes money from the spread, buying slightly lower than it sells, and manages the risk of holding positions by hedging and adjusting its quotes. On some exchanges, designated market makers must keep quoting within a maximum spread in return for lower fees or other benefits.

Market makers are central to liquidity, especially in less frequently traded shares, bonds and ETFs, where they help keep prices close to the value of the underlying assets. When a private investor buys through a broker, the order is often filled by a market maker rather than matched with another investor. Competition between market makers tends to narrow spreads, but in stressed markets they may widen their quotes sharply or step back. In the US, some brokers are paid by market makers for routing retail orders to them, a practice called payment for order flow that UK rules effectively prohibit and the EU has banned.