What Is the Difference Between a Broker and a Market Maker?

There are many different players that take part in the market. These include buyers, sellers, dealers, brokers, and market makers. Some help facilitate sales between two parties while others help create liquidity in the market.

Below, we outline the differences between brokers and market makers.

In the financial world, a broker makes money by bringing together assets to buyers and sellers. These may include securities or even real estate. Brokers are intermediaries who have the authorization and expertise to buy securities on an investor's behalf.

Brokers will also provide their clients with more value-added services. These services may include consulting or research.

Because brokers are regulated and licensed, they have an obligation to act in the best interests of their clients. Many brokers can also offer advice on what stocks, mutual funds, and other securities to buy. Due to the availability of online trading platforms, many investors can initiate transactions with little or no contact with their personal broker.

A market maker helps to create a market for investors to buy or sell securities. Market makers are typically large banks or financial institutions. They help to ensure there's enough liquidity in the markets, meaning there's enough volume of trading so trades can be done seamlessly. Without market makers, there would likely be little liquidity. In other words, investors who want to sell securities would be unable to unwind their positions due to a lack of buyers in the market.

Market makers help to keep the market functioning, meaning if you want to sell a bond, they are there to buy it. Similarly, if you want to buy a stock, they're there to have that stock available to sell to you.

Market makers are useful because they are always ready to buy and sell as long as the investor is willing to pay a specific price. Market makers essentially act as wholesalers by buying and selling securities to satisfy the market—the prices they set reflect market supply and demand. When the demand for a security is low, and supply is high, the price of the security will be low. If the demand is high and supply is low, the price of the security will be high. Market makers are obligated to sell and buy at the price and size they have quoted.

Sometimes a market maker is also a broker, which can create an incentive for a broker to recommend securities for which the firm also makes a market. Therefore, investors should perform due diligence to make sure that there is a clear separation between a broker and a market maker.

Brokers are independent parties whose services are used in various industries including the investment world and even real estate. Stockbrokers coordinate contracts between buyers and sellers usually for a commission. In real estate, a broker will facilitate the sale or rental of a property between the seller and the buyer.

As mentioned above, market makers can be individuals or firms. Some of the bigger market makers include BNP Paribas, Deutsche Bank, Morgan Stanley, and UBS. These all provide high levels of liquidity in the market.

Investors must hire licensed brokers to purchase or sell securities. A flat fee or percentage-based commission is given to the broker for carrying out a trade and finding the best price for a security.

Market makers charge a spread on the buy and sell price, and transact on both sides of the market. Market makers establish quotes for the bid and ask prices, or buy and sell prices. Investors who want to sell a security would get the bid price, which would be slightly lower than the actual price. If an investor wanted to buy a security, they would get charged the ask price, which is set slightly higher than the market price. The spreads between the price investors receive and the market prices are the profits for the market makers.

Market makers also earn commissions by providing liquidity to their clients' firms.

Brokers and market makers are two very important players in the market. Brokers are typically individuals who operate in the best interests of their clients and facilitate the sale of an asset to a buyer or seller. Market makers are typically large investment firms or financial institutions that create liquidity in the market.