Make A Market

Make a market is an action whereby a dealer stands by ready, willing and able to buy or sell a particular security at the quoted bid and ask price. By being able to make a market allows the brokerage to fill customer orders out of the brokerage inventory, which is faster and easier than filling orders from other brokerages or investors.

Market makers are the ones that make markets. Market makers are "market participants" or member firms of an exchange that also buy and sell securities at prices it displays in an exchange’s trading system for its own account, which are called principal trades and for customer accounts which are called agency trades. Market makers can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those orders. Market makers exist under rules created by stock exchanges approved by a securities regulator. In the U.S., the Securities and Exchange Commission (SEC) is the main regulator of the exchanges. Market maker rights and responsibilities vary by exchange, and the market within an exchange such as equities or options.

In order to make a market, a brokerage firm must be willing to hold a disproportionately large amount of a given security so it can satisfy a high volume of market orders in a matter of seconds at competitive prices. In contrast to a conventional brokerage, being a market maker requires a higher risk tolerance because of the high amounts of a given security that a market maker must hold. Market makers promote market efficiency by keeping markets liquid. To ensure impartiality for their clients, brokerage houses that function as market makers are legally required to separate their market making activities from their brokerage sales operations.

If investors are selling, market makers are obligated to keep buying, and vice versa. They are supposed to take the opposite side of whatever trades are being conducted at any given point in time. As such, market makers satisfy the market demand for a security and facilitate its circulation. The NASDAQ, for example, relies on market makers within its network to ensure efficient trading.

Market makers profit through the market maker spread, not whether a security goes up or down. They are supposed to buy or sell securities according to what kind of trades are being placed, not according to whether they think prices will go up or down.