# Understanding Market Makers: Roles, Profits, and Their Impact on Liquidity

![Market Maker](https://www.investopedia.com/thmb/JTvyJDRLyJJ83IkdtJ4f6mZJqSM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/marketmaker-56215c927e5547feb96badd6e88675e5.jpg)

*— Investopedia / Julie Bang*

> **Definition**
>
> Market makers play an essential role in financial markets by providing buy and sell quotations and ensuring liquidity. They profit from the bid-ask spread, enabling efficient trading for investors.

## What Is a Market Maker?

The term "market maker" refers to a firm or individual who actively quotes both sides of a market in a particular security by providing bids and offers (known as asks) along with the market size of each. In fact, they are obligated to engage in such trading activity.

Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask spread. They may also trade for their own accounts. Such trades are known as principal trades.  

### Key Takeaways

*   Market makers are essential participants in financial markets, providing liquidity by buying and selling securities for their own accounts.
*   They earn profits from the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp), which is the difference between the prices at which they buy and sell securities.
*   Market makers are obligated to continuously provide quotes for buying and selling, maintaining market functionality even during volatile periods.
*   Designated market makers, like those at the New York Stock Exchange, have exclusive responsibilities for specific securities, ensuring orderly and fair trading.
*   The role of market makers extends across major global exchanges, including Nasdaq, Frankfurt Stock Exchange, and Tokyo Exchange Group.

## The Role and Importance of Market Makers

Many market makers are [brokerage](https://www.investopedia.com/terms/b/brokerage-company.asp) firms that offer trading services to investors, helping to maintain liquidity in financial markets.

A market maker can also be an individual trader, who is commonly known as a local. Most market makers represent large institutions because they handle [big trade volumes](https://www.investopedia.com/ask/answers/12/what-is-done-when-shares-are-bought-and-sold.asp).

### How Market Makers Operate

Each market maker shows buy and sell prices for a set number of shares. Once the market maker receives an order from a buyer, they immediately sell their position of shares from their own [inventory](https://www.investopedia.com/terms/i/inventory.asp). This allows them to complete the order.

A market maker must commit to continuously quoting prices at which it will buy (or [bid](https://www.investopedia.com/terms/b/bid.asp) for) and sell (or [ask](https://www.investopedia.com/terms/a/ask.asp) for) securities. Market makers must also quote the volume in which they're willing to trade along with the frequency of time they will quote at the [best bid](https://www.investopedia.com/terms/b/bestbid.asp) and best offer prices.

Market makers must stick to these parameters at all times, no matter what their market outlook. When markets become erratic or [volatile](https://www.investopedia.com/terms/v/volatility.asp), market makers must remain disciplined in order to continue facilitating smooth transactions.

### Regulatory Framework for Market Makers

Market makers must operate under a given exchange's bylaws, which are approved by a country's securities regulator. In the United States, that regulator is the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp). Market makers' rights and duties differ by exchange and type of financial instrument, like stocks or options.

> **Fast Fact**
>
> Making a market signals a willingness to buy and sell the securities of a certain set of companies to broker-dealer firms that are members of an exchange.

## Revenue Generation Strategies for Market Makers

Market makers are compensated for the risk of holding securities (that they make markets for) that may decline in value after they're purchased from sellers and before they're sold to buyers.

They also earn money from the [spread](https://www.investopedia.com/terms/s/spread.asp) on each security they trade. For example, when an investor searches for a stock using an online brokerage firm, it might observe a bid price of $100 and an ask price of $100.05. This means the broker purchases the stock for $100, then sells it to buyers for $100.05. Through high-volume trading, a small spread can add up to a large amount of daily revenue.

## Comparing Market Makers and Designated Market Makers

Many exchanges have market makers competing to give the best prices to attract orders. But some entities, such as the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp), have what's called a [designated market maker (DMM)](https://www.investopedia.com/terms/d/designated-market-maker-dmm.asp) system instead.

Previously referred to as [specialists](https://www.investopedia.com/terms/s/specialist.asp), DMMs are essentially lone market makers with a monopoly on the order flow of a particular security or securities. Because the NYSE is an [auction market](https://www.investopedia.com/terms/a/auctionmarket.asp), bids and asks are competitively forwarded by investors.

Here's how it works: The DMM posts these bids and asks for the entire market to see and ensures they are reported in an accurate and timely manner. They also make sure that the best price is always maintained, that all marketable trades are executed, and that order is maintained on the floor.

The DMM must also set the opening price for the stock each morning, which can differ from the previous day's closing price based on after-hours news and events. They determine the correct market price based on [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp).

### $40.72 trillion

Latest figure for the total market capitalization of domestic companies listed on exchanges in the U.S.

## Key Market Makers Across Major Exchanges

Market makers offer trading services for investors in the [securities market](https://www.investopedia.com/articles/stocks/11/securities-market-introduction.asp). Their activities through their [entity trading accounts](https://www.investopedia.com/terms/e/entity-trading-account.asp) produce and boost liquidity within the markets.

Exchanges throughout the world make use of market makers. Here are some of the most popular ones:

### NYSE and Nasdaq

The [NYSE and Nasdaq](https://www.investopedia.com/articles/basics/03/103103.asp) are the two main stock exchanges in the U.S. Both are based in New York.

According to the NYSE, a market maker is an "ETP holder or firm that has registered" to trade securities with the exchange.

On Nasdaq, a market maker is a firm that buys and sells securities for its own and customer accounts.

Some of the designated market makers in New York include:

*   Citadel Securities LLC
*   GTS Securities LLC
*   Virtu Americas LLC  
    

### Frankfurt Stock Exchange

The [Frankfurt Stock Exchange (FRA)](https://www.investopedia.com/terms/f/frankfurt-stock-exchange-fra-.f.asp) is one of seven stock exchanges in Germany. It is also the largest. Deutsche Börse AG runs the exchange and calls its market makers "designated sponsors."

Here are some market makers on Xetra, the exchange group’s electronic trading platform:

*   Berenberg
*   JPMorgan
*   Morgan Stanley
*   Optiver
*   UBS Europe  
    

### London Stock Exchange Group

London is home to one of the largest stock exchange groups in Europe. The [London Stock Exchange (LSE)](https://www.investopedia.com/terms/l/lse.asp) is part of the London Stock Exchange Group. This group also includes the family of FTSE Russell Indexes and the group's clearing services.

The following are some of the key market makers in this part of the world:

*   BNP Paribas
*   GMP Securities Europe
*   Liberium Capital
*   Mediobanca
*   Standard Chartered  
    

### Tokyo Exchange Group

The Tokyo Exchange Group combined the Tokyo Stock Exchange and the Osaka Securities Exchange into one unit in 2013. In addition to [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) and data, the group provides "market users with reliable venues for trading listed securities and derivatives instruments."

According to JPX, the following are some of the key names among market makers:

*   ABN AMRO Clearing
*   Nissan Securities
*   Nomura Securities
*   Phillip Securities
*   Societe Generale

### Toronto Stock Exchange

Toronto is considered to be Canada's financial capital, and it's the location of the country's leading stock exchange. The [Toronto Stock Exchange (TSX)](https://www.investopedia.com/terms/t/toronto-stock-exchange-tsx.asp), which is the country's largest exchange, is owned by TMX Group.

The TSX lists the following among its market makers:

*   BMO Nesbitt Burns
*   Integral Wealth Solutions
*   Questrade
*   Scotia Capital
*   TD Securities

> **Important**
>
> Market makers facilitate a smooth flow of market activity by making it easier for investors and traders to buy and sell. Without market makers, there could be insufficient transactions and fewer opportunities to invest efficiently.

## Example of a Market Maker

Let's say there's a market maker in XYZ stock. They may provide a quote of $10.00 - $10.05 or 100 x 500. This means that they bid (they will buy) 100 shares at $10.00. They'll also offer (they will sell) 500 shares at $10.05. Other market participants may then buy (lift the offer) from the market maker at $10.05 or sell to them ([hit the bid](https://www.investopedia.com/terms/h/hitthebid.asp)) at $10.00.  

## What's the Role of a Market Maker?

A market maker plays a key role in the securities market by providing trading services for investors and boosting market liquidity. Specifically, they provide bids and offers for securities, along with the market size.

## Why Do Market Makers Matter?

They matter because they ensure that the securities markets continue to function. Market makers must commit to providing markets for securities on both the buy and the sell sides.

## How Do Market Makers Work?

Market makers operate and compete with each other to attract the business of investors by setting the most competitive bid and ask offers. In some cases, exchanges may have designated market makers (or specialists), each of whom is responsible for making a market in specific securities. The specialist process exists to ensure that all marketable trades are executed at a fair price in a timely manner.

## The Bottom Line

Market makers play a critical role in ensuring that financial markets remain liquid and functional. By continuously offering competitive bids and offers for securities, they enable a smooth flow of transactions between buyers and sellers. Their ability to quote prices and volumes, even in volatile market conditions, underscores their importance in maintaining market stability and efficiency. Understanding the role of market makers can help investors appreciate the mechanisms that facilitate their transactions.

> **Article Sources**
>
> 1.  NYSE. "[Market Making on NYSE Arca, NYSE American, NYSE National, and/or NYSE](https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Exchanges_Market_Maker_Orientation.pdf)."
>     
> 2.  U.S. Securities and Exchange Commission. "[Market Makers](https://www.sec.gov/fast-answers/answersmktmakerhtm.html)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Executing an Order](https://www.sec.gov/fast-answers/answerstrdexbdhtm.html)."
>     
> 4.  NYSE. "[Designated Market Makers](https://www.nyse.com/publicdocs/nyse/markets/nyse/designated_market_makers.pdf)."
>     
> 5.  The World Bank. "[Market capitalization of listed domestic companies (current US$) - United States](https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US)."
>     
> 6.  NYSE. "[Market Makers](https://www.nyse.com/markets/nyse-arca/membership-types)."
>     
> 7.  U.S. Securities and Exchange Commission. "[Nasdaq Market Center Systems Description](https://www.sec.gov/files/rules/other/nasdaqllcf1a4_5/e_sysdesc.pdf)."
>     
> 8.  Nasdaq Trader. "[How to Become a Market Maker](http://www.nasdaqtrader.com/trader.aspx?id=marketmakerprocess)."
>     
> 9.  NYSE. "[Membership](https://www.nyse.com/markets/nyse/membership)," Scroll down to NYSE Designated Market Maker Firms.
>     
> 10.  Börse Frankfurt. "[Designated Sponsor](https://www.boerse-frankfurt.de/en/know-how/glossary/designated-sponsor)."
>      
> 11.  Xetra. "[List of Designated Sponsors](https://www.xetra.com/xetra-en/trading/trading-models/liquidity-through-designated-sponsors/list-of-designated-sponsors)."
>      
> 12.  LSEG. "[About LSEG](https://www.lseg.com/en/about-us)."
>      
> 13.  Financial Conduct Authority. "[List of market makers and authorised primary dealers using the exemption under the UK version of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps](https://www.fca.org.uk/publication/documents/market-makers-authorised-primary-dealers.pdf)."
>      
> 14.  Japan Exchange Group. "[Exchange and Beyond](https://www.jpx.co.jp/english/corporate/index.html)," Scroll down to About JPX.
>      
> 15.  Japan Exchange Group. "[List of Market Makers](https://www.jpx.co.jp/english/derivatives/rules/market-maker/tvdivq0000003l9t-att/OSE_ListofMarketMakers_20240701.pdf)."
>      
> 16.  TMX. "[Canada's Leading Markets](https://www.tsx.com/en/trading)."