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Market Makers — Keepers of Healthy Financial Markets

Market makers are responsible for injecting liquidity into a market and maintaining it throughout the trading day, as well as helping to keep the market fair and orderly per the Securities and Exchange Commission.

Gemini-Market Makers — Keepers of Healthy Financial Markets

Summary

While individual investors buy and sell their favorite assets at stock and crypto exchanges, market makers work behind the scenes to ensure that the process goes smoothly. Market makers are responsible for injecting liquidity into a market and maintaining it throughout the trading day, as well as helping to keep the market fair and orderly per the Securities and Exchange Commission.

Contents

It’s easy to take for granted how fast and efficiently you can place a trade today. But remember that whenever an asset is bought or sold, there must be somebody on the other side of that transaction. Market makers facilitate sales between two parties, and ensure that there are both buyers and sellers of specific securities in the market at any given time.

What Is a Market Maker?

A market maker is an individual participant or member firm of a stock exchange whose role is to buy and sell securities from their own account throughout the trading day in order to add liquidity to financial markets. Market makers are typically foreign-exchange firms, banks, or high-frequency trading firms tasked with facilitating trade of a particular asset.  

A market maker owns a large inventory of stocks or digital currencies and sells them to other broker-dealers, which ensures that investors can access them on demand and that markets remain liquid (i.e., filled with buyers and sellers as well as low transaction fees).  

How Do Market Makers Profit?

Because market makers must hold a certain volume of a particular asset, they run the risk of losing money if that asset falls in price once purchased. For this reason, market makers are allowed to take cuts of bid-ask price spreads (or differentials) in a buy (bid) or sell (ask) transaction. For example, they can quote an asset’s bid price at $20 and its ask price at $20.15, meaning they will take a $0.15 cut per share if a buyer purchases the asset. This is true of market makers in traditional financial markets as well as in the cryptocurrency market.

Essentially, a market maker acts as the anchor of every trade. Without these key intermediaries working to ensure that enough assets are available to trade easily and at attractive prices, billions of daily capital-markets transactions would not be possible.

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