Market maker

A participant that continuously quotes both a buying and a selling price in a security, standing ready to trade with either side and earning the spread between the two.

Example

Quoting 47.80 bid and 47.95 offered, a market maker earns 0.15 per share on any round trip it completes.

Important

Market makers are not a service; they are counterparties compensated by the spread. That spread is the visible price of the continuous liquidity you are using.

Related terms

• Bid-ask spread — The gap between the highest price a buyer will pay and the lowest a seller will accept. A cost paid on every round trip.
• Order book — The live, price-ranked list of all resting buy and sell orders for a security, showing how many shares are available at each level on each side.
• Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.
• Price discovery — The continuous process by which buyers and sellers transacting produce a current market price for an asset.

Lessons that explain it

• Two prices: what the holdings are worth, and what somebody will pay — Net asset value is an accounting fact struck at a moment. An exchange-traded fund's market price is a live opinion. The gap between them is sometimes a mispricing and sometimes the more honest number. (12 min)
• A continuous auction: what the quote is, and what it is not — The price is what the marginal buyer and the marginal seller agreed a moment ago. It is a fact about two people, and it is not a valuation. (12 min)

All 578 terms in the Investing glossary