Market Makers
What It Is
Market makers are firms or individuals that provide liquidity by continuously quoting buy and sell prices for securities.
Why It Matters
They ensure smooth trading, narrow spreads, and orderly markets.
How It Works
- Quote bid and ask prices
- Profit from the spread
- Absorb temporary imbalances in supply and demand
- Required to maintain fair and orderly markets
Key Components
- Liquidity provision
- Spread management
- Inventory risk
- Exchange obligations
Example
On the NASDAQ, market makers compete to offer the best prices, improving execution quality for traders.
Key Takeaways
- Market makers are essential for liquidity.
- They stabilize markets during normal conditions.
- They face risk when volatility spikes.