What is a Market Maker?

A market maker is a financial firm that stands ready to buy and sell a particular stock or other security at any time during trading hours. Their job is to provide liquidity. To ensuring that when you want to buy or sell, there is always a counterparty available, even if no other investor happens to want the opposite trade at that exact moment.

How do market makers make money?

They profit from the spread, the small difference between the price at which they are willing to buy a security and the price at which they are willing to sell it. If a market maker buys shares at $49.95 and sells them at $50.00, they make $0.05 on every share that passes through. Multiply that across millions of trades and it becomes a substantial business.

Why are market makers important?

Without them, markets would be far less efficient. You might place an order to sell shares and wait a long time for a buyer to appear. Market makers eliminate that friction. They absorb the mismatch between buyers and sellers moment to moment, making it possible to trade quickly and at predictable prices.

Do market makers manipulate prices?

Market makers do influence short term price movements by adjusting their quotes, but this is a normal and legitimate part of how markets function, not manipulation. They are regulated and required to meet certain obligations such as continuously quoting prices within a set range in exchange for their role.

Does this affect you as a long term investor?

Very little. Market makers matter most to traders who are buying and selling frequently or in large quantities. For a long-term investor placing occasional trades in a broadly held index fund, the spread is negligible and the presence of market makers simply means your order executes quickly and reliably.