Market Maker

A market maker is a broker-dealer firm that maintains continuous two-sided quotes — both a bid price (what they will pay to buy) and an ask price (what they will sell for) — in a security. By standing ready to execute both sides at all times, market makers provide the immediate liquidity that allows other participants to trade whenever they want, rather than having to wait for a natural counterparty to appear.

How Market Makers Profit

Market makers earn the bid-ask spread as their primary revenue source. If a market maker quotes $100.00 bid / $100.05 ask on a stock, and they execute a buy from one participant at $100.00 and a sell to another at $100.05, they earn $0.05 per share on that round trip. On a stock trading millions of shares per day, this spread revenue is substantial even at fractions of a cent per share. Market makers also earn exchange rebates for providing liquidity on exchanges that use maker-taker pricing.

Market Makers and Retail Order Flow

Retail brokerages typically route customer orders to wholesale market makers (Citadel Securities, Virtu Financial, Jane Street) through a practice called Payment for Order Flow (PFOF). The wholesale market maker pays the brokerage a small fee per share for the right to execute the retail order, then internalizes it — executing it against their own inventory rather than sending it to a public exchange. The market maker profits from the spread while potentially offering the retail customer a small price improvement over the public best bid or offer.

Designated Market Makers (DMMs) on Exchanges

NYSE uses a Designated Market Maker model where specific firms are assigned to individual stocks and have heightened obligations to maintain orderly trading. DMMs must provide continuous quotes within a specified percentage of the last sale, commit capital during periods of imbalance, and facilitate openings and closings. In exchange, they receive certain information advantages about order flow imbalances that other participants do not have.

Market Makers in Options

Options markets rely heavily on market makers who continuously quote bids and asks on every strike and expiration combination for assigned underlyings. Options market makers hedge their positions dynamically using delta hedging — buying or selling the underlying stock to offset their options exposure. This delta-hedging activity is a significant source of intraday equity order flow and can amplify price moves when large options positions are being hedged.