What is a market maker?

Definition and Example of a Market Maker

Market makers are high-volume traders who “make a market” for securities by always being ready to buy or sell. They profit from the bid-ask spread and enhance the market by adding liquidity.

How Does a Market Maker Work?

This system of determining bid and ask prices is beneficial for traders. It allows them to execute trades almost anytime they wish. For example, when you place a market order to sell 100 shares of XYZ, the market maker will buy the shares from you, even if they do not have a seller available. The opposite is also true, as any shares a market maker cannot sell immediately will help satisfy sell orders that will come later.

What Does This Mean for Individual Investors?

The speed and simplicity with which stocks are bought and sold should not be taken for granted, especially in the age of app-based investing. It only takes a few clicks to place an order with your brokerage firm, and depending on the type of order, it can be executed within seconds.

However, without market makers, the trading process would slow down significantly. It would take much longer to match buyers and sellers with each other. This would reduce liquidity, making it harder for you to enter or exit positions and increase trading costs and risks.

Financial markets need to operate smoothly because investors and traders prefer to buy and sell easily. Without market makers, it is unlikely that the market would maintain its current trading volume. This would decrease the amount of money available to companies and thus their value.

Source: https://www.thebalancemoney.com/what-is-a-market-maker-and-how-do-they-make-money-4053753