Market Makers & Liquidity

Introduction

For a market to work, someone always needs to be ready to buy and sell. Market makers fill that role by standing ready to quote both a bid and an ask. This lesson explains what they do and why liquidity matters.

Who Are Market Makers?

Market makers are firms (often banks or specialized trading firms) that continuously quote both a bid (they'll buy) and an ask (they'll sell) for a security. They exist on many exchanges and maintain two-sided liquidity.

How They Earn

Market makers profit from the spread — buying at the bid and selling at the ask. They take modest, frequent profits while managing the risk of holding inventory.

Market maker quotes:  Bid $99.90 / Ask $100.00
Buys at $99.90, sells at $100.00 -> earns $0.10 spread

Why They Matter

Without market makers, a buyer might wait hours for a seller to appear. Market makers ensure you can usually buy or sell almost instantly, which is what makes markets liquid.

Liquidity Defined

Liquidity is the ability to convert an asset to cash quickly without a big change in price. Liquid stocks trade in high volume with tight spreads; illiquid ones are the opposite.

The Trade-Off

Market makers take on the risk of holding positions between trades. In exchange, markets get continuous, reliable prices. This is why the spread exists — it compensates them for providing that service.

Summary

• Market makers continuously quote a bid and an ask
• They earn the spread for providing two-sided liquidity
• They let you buy and sell almost instantly
• Liquidity = easy trading without large price impact
• Liquid markets = tight spreads; illiquid = wide spreads

Next Lesson

Two fast and risky strategies: short selling and high-frequency trading.