Glossary · from the DESK dictionary
Market Maker
A market participant who continuously quotes buy and sell prices to provide liquidity.
In plain words
Market makers are the financial markets' "wholesalers" — they earn primarily from the bid-ask spread.
In more detail
A market maker continuously posts bid and ask quotes and earns the spread. His business model is not forecasting but inventory management: he takes on positions he does not want and must neutralise them as quickly as possible. A practically usable insight follows — his quotes shift with his inventory. Whoever has sold him too much of one side gets a worse price for the next unit.
Example
A market maker has taken on 800 contracts on the bid within minutes. He shifts his quotes down two ticks — not because of a view but to get rid of the inventory.
What it means for traders
A central actor in market structure, whose hedging activity (e.g. gamma exposure) can influence short-term price moves.
Common pitfalls
Market makers bear inventory risk and can suffer losses during extreme market moves.
Related terms
Affirmative Obligation · Axe (Trading Slang) · Designated Sponsor · Bid-Ask Spread · Broker-Dealer · Citadel Securities · Dealer · Delta Hedging · ECN Broker · Electronic Communications Networks (ECNs) · Flow Traders · Flow Trading · High-Frequency Market Making · High-Frequency Trading (HFT) · Hot Potato Effect · IMC Trading · Jane Street · Jobber · Jump Trading · Ken Griffin · Limit Order Book · Liquidity · Liquidity Provider · Maker Fee · Market Maker of Last Resort · Option Book · Options Market · Optiver · Order Book · Order Flow Toxicity · Orderly Market · Payment for Order Flow (PFOF) · Price Driven Market · Primary Market Maker · Quote-Driven Market · Reference Market · Susquehanna International Group (SIG) · Third Market Maker · Two-Way Market · Virtu Financial · Volatility Market Maker · Wolverine Trading
From the DESK dictionary. For information only, not investment advice.
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