What is the difference between a broker and a market maker?

By Nicola Sargeant AAA
A:

A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts between buyers and sellers, usually for a commission. A market maker, on the other hand, is an intermediary that is willing and ready to buy and sell securities for a profitable price.

A broker makes money by bringing together securities' buyers and sellers. Brokers have the authorization and expertise to buy securities on an investor's behalf - not just anyone is allowed to walk into the New York Stock Exchange and purchase stocks; therefore, investors must hire licensed brokers to do this for them. A flat fee or percentage-based commission is given to the broker for carrying out a trade and finding the best price for a security. Because brokers are regulated and licensed, they have an obligation to act in the best interests of their clients. Many brokers can also offer advice on what stocks, mutual funds and other securities to buy. Due to the availability of internet-based automated stock brokering systems, clients often do not have any personal contact with their brokerage firms.

A market maker makes a profit by attempting to sell high and buy low. Market makers establish quotes whereby the bid price is set slightly lower than listed prices and the ask price is set slightly higher in order to earn a small margin. Market makers are useful because they are always ready to buy and sell as long as the investor is willing to pay a specific price. This helps to create liquidity and efficiency in the market. Market makers essentially act as wholesalers by buying and selling securities to satisfy the market; the prices they set reflect market supply and demand. When the demand for a security is low and supply is high, the price of the security will be low. If the demand is high and supply is low, the price of the security will be high. Market makers are obligated to sell and buy at the price and size they have quoted. (For further reading, see Why The Bid-Ask Spread Is So Important.)

It is often the case that a market maker is also a broker. This can sometimes create the incentive for the broker to recommend securities for which he or she also makes a market. Therefore, investors should make sure that there is a clear separation between a broker and a market maker.

For further reading, see Understanding Order Execution and Markets Demystified.

RELATED FAQS

  1. Why is purchasing stocks on margin considered more risky than traditional investing?

    Learn why purchasing stocks on margin is riskier than traditional investing, although it can be more profitable when it is ...
  2. What is the difference between positive correlation and inverse correlation?

    Learn the difference between a positive correlation and a negative, or inverse, correlation and the way they apply to the ...
  3. What are my options when I get a margin call?

    Understand what a margin call means and the two primary options for meeting a margin call, such as depositing additional ...
  4. How do I sign up for a Series 63 exam as a foreign national if I don’t have a Social ...

    Learn how to sign up for a Series 63 exam, even if you do not have a Social Security card or CRD number, by using the Uniform ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...
  3. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  4. Execution Only

    A trading service that is restricted to execution of trades only, ...
  5. Business Broker

    A professional who specializes in the purchase and sale of companies. ...
  6. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee ...

You May Also Like

Related Articles
  1. Trading Strategies

    Risk Management Techniques For Shorting ...

  2. Professionals

    How to Choose a Robo-advisor? Follow ...

  3. Trading Strategies

    Not All Online Trading Brokers Are Created ...

  4. Brokers

    How long does it take a broker to confirm ...

  5. Investing Basics

    The NASDAQ Pre-Market: What You Need ...

Trading Center