market maker
A firm or individual that continuously quotes both buy and sell prices for a security, providing liquidity to markets and profiting from the bid-ask spread.
Example
“Citadel Securities acts as a market maker for millions of stock trades daily, earning a tiny spread on each transaction.”
Memory Tip
MARKET MAKER = MAKES the market. Always there to buy or sell, keeping things liquid.
Why It Matters
Market makers directly affect the costs you pay when buying or selling stocks or other securities. The bid-ask spread they maintain determines how much extra you pay beyond the current market price, which can significantly impact your investment returns over time, especially for frequent traders.
Common Misconception
Many people believe market makers are neutral intermediaries who do not profit from trades. In reality, market makers actively profit from the difference between buying and selling prices, which means they have financial incentives that may not always align perfectly with getting you the best possible price.
In Practice
When you want to buy 100 shares of a stock, a market maker might quote a bid price of 50.00 dollars and an ask price of 50.05 dollars. If you buy at 50.05 dollars and sell later at 50.00 dollars, you lose 5 dollars on the spread alone, which goes directly to the market maker as profit.
Etymology
MARKET (trading venue) + MAKER (one who creates). The market maker MAKES the market by always being ready to trade.
Common Misspellings
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Related Terms
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See Also
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