Market Maker: definition | Glossary

Quoting both sides, bid and ask:making a market is the task.

A broker or institution that provides liquidity by quoting both bid and ask prices and is prepared to take the other side of a trade.

Market makers profit from the spread between bid and ask.

In plain words

A market maker is a firm that continuously quotes two prices for an instrument: a bid at which it will buy and an ask at which it will sell. When a client trades on those prices, the market maker itself is the other side of the trade.

See it move

Step through the stages

Stage 2 of 3: Market maker

A trade passes from a seller, through the market maker, to a buyer; stepping through the stages shows the market maker buying at its bid and selling at its ask.To try it, point at the diagram, drag a finger across it or use the slider: step through the stages.

Why it matters

Market makers supply the standing prices that let others trade immediately. A broker that acts as market maker is the counterparty to its clients’ trades, which is a conflict of interest, and a broker’s order execution policy is where its model is described.

Worked example

An example only. The figures are round and invented for the arithmetic: they are not market prices.

A market maker quotes a pair at 1.3000 bid and 1.3002 ask; one client sells one standard lot and another buys one standard lot at those prices.

1It buys from the seller at 1.3000
2It sells to the buyer at 1.3002
3Difference1.3002 − 1.3000 = 0.0002, or 2 pips
42 pips × 10 = 20 units of the quote currency

With the two trades matched, the market maker keeps the spread of 20 and has no position left.

A common mistake

A market maker does not simply collect the spread on every trade. When buying and selling do not match, the firm is left holding a position whose value moves with the market, and it has to manage or hedge that risk.