A:

An earnings surprise is an event where the earnings of a company are greater or lower than the predictions put forth by analysts, usually by a relatively large margin. Depending on the earnings report, it is the buyers/sellers that will respond in the market and drive the price either up or down. The market makers will react to the increased buying or selling pressure buy making adjustments to the bid and ask prices along with making changes to their size guarantees.

The purpose of a market maker is to hold an inventory of securities where they both buy and sell the securities to create a market for the security allowing for greater liquidity. It competes for order flow by displaying what it will buy or sell the security for and will either buy or sell out of their own inventory or find an offsetting order in the market. In a fast moving market, such that occurs during earnings announcement, there is a large number of buy and sell orders hitting the market which places more of an emphasis on order matching for market makers than buying and selling out their own inventory.

Although the market maker is responsible for creating a market for a security, which means buying and selling the security from their own inventoy, keep in mind that ultimately, it is the buyers and sellers in the market that drive the price of these stocks. The market makers reacting to the changing conditions by matching buyers and sellers.

For further reading, see Find Investment Quality In The Income Statement, Surprising Earnings Results, Earnings Forecasts: A Primer and Whisper Numbers: Should You Listen?

RELATED FAQS
  1. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  2. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Answer >>
  3. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  4. What is earnings management?

    Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer ... Read Answer >>
  5. How do I buy an over-the-counter stock?

    The process of purchasing over-the-counter (OTC) stocks is different than purchasing stock from companies on the NYSE and ... Read Answer >>
  6. I don't understand how a stock has a trading price of 5.97, but when I buy it I have ...

    It might seem logical that the last traded price of a security is the price at which it would currently be trading, but this ... Read Answer >>
Related Articles
  1. Retirement

    Electronic Trading: The Role of a Market Maker

    Market makers compete for customer order flows by displaying buy and sell quotations for a guaranteed number of shares. The difference between the price at which a market maker is willing to ...
  2. Investing Basics

    Role Of A Market Maker

    A market maker is a firm or an individual that stands ready to buy and sell a particular security throughout the trading session to maintain liquidity and a fair and orderly market in that security. ...
  3. Markets

    Surprising Earnings Results

    Consensus estimates can send stocks spiraling - but are they representing reality?
  4. Brokers

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
  5. Investing Basics

    What Happens in a Haircut?

    One meaning of haircut is the difference between prices at which a market maker can buy and sell a security.
  6. Options & Futures

    How To Avoid Closing Options Below Intrinsic Value

    To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade.
  7. Economics

    What are Earnings?

    The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year.
  8. Charts & Patterns

    The Importance Of Tracking The Whisper Number (AAPL, FB)

    Don't let the name fool you: Whisper numbers are making themselves heard. Here's why you should be paying attention.
  9. Investing Basics

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  10. Investing

    Top 5 Reasons For A Stock Slide

    Prices seldom drop without cause. Find out what might make your stock hit the skids.
RELATED TERMS
  1. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
  2. Third Market Maker

    A third-party securities dealer that is ready and willing to ...
  3. Bid

    1. An offer made by an investor, a trader or a dealer to buy ...
  4. Ask Size

    The amount of a security that a market maker is offering to sell ...
  5. Order Driven Market

    A financial market where all buyers and sellers display the prices ...
  6. Inside Quote

    The best bid and ask prices offered to buy and sell a security ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center