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?

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