A firm that continuously quotes both a bid and an ask, earning the spread in exchange for providing liquidity.
Market makers post prices on both sides of the order-book so that other traders can transact immediately. Their profit comes from the bid-ask-spread and from managing inventory, not from predicting direction.
They are not villains, but they are not your friends either. Their incentives are to earn the spread and stay flat. Under payment-for-order-flow, retail brokers route orders to market makers who pay for the privilege of filling them.
Example: a market maker quotes $25.00 bid / $25.02 ask on a stock. Over the day they buy 100,000 shares at the bid and sell 100,000 at the ask, netting about $2,000 before hedging costs.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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