What is 'Make A Market'

Make a market is an action whereby a dealer stands by ready, willing and able to buy or sell a particular security at the quoted bid and ask price. By being able to make a market allows the brokerage to fill customer orders out of the brokerage inventory, which is faster and easier than filling orders from other brokerages or investors.

BREAKING DOWN 'Make A Market'

Market makers are the ones that make markets. Market makers are "market participants" or member firms of an exchange that also buy and sell securities at prices it displays in an exchange’s trading system for its own account, which are called principal trades and for customer accounts which are called agency trades. Market makers can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those orders. Market makers exist under rules created by stock exchanges approved by a securities regulator. In the U.S., the Securities and Exchange Commission (SEC) is the main regulator of the exchanges. Market maker rights and responsibilities vary by exchange, and the market within an exchange such as equities or options.

How a Market Maker Makes a Market

In order to make a market, a brokerage firm must be willing to hold a disproportionately large amount of a given security so it can satisfy a high volume of market orders in a matter of seconds at competitive prices. In contrast to a conventional brokerage, being a market maker requires a higher risk tolerance because of the high amounts of a given security that a market maker must hold. Market makers promote market efficiency by keeping markets liquid. To ensure impartiality for their clients, brokerage houses that function as market makers are legally required to separate their market making activities from their brokerage sales operations.

If investors are selling, market makers are obligated to keep buying, and vice versa. They are supposed to take the opposite side of whatever trades are being conducted at any given point in time. As such, market makers satisfy the market demand for a security and facilitate its circulation. The NASDAQ, for example, relies on market makers within its network to ensure efficient trading.

Market makers profit through the market maker spread, not whether a security goes up or down. They are supposed to buy or sell securities according to what kind of trades are being placed, not according to whether they think prices will go up or down.

RELATED TERMS
  1. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
  2. Inside Quote

    Inside quotes are the best bid and ask prices offered to buy ...
  3. Continuous Trading

    Continuous trading is a method for transacting security orders. ...
  4. Last-Sale Reporting

    Last-sale reporting is the submission of details about the quantity ...
  5. Order

    An order is an investor's instructions to a broker or brokerage ...
  6. Trading Ahead

    Trading ahead occurs when a market maker trades securities from ...
Related Articles
  1. Investing

    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. ...
  2. Personal Finance

    How brokers can avoid a market-maker's tricks

    Ensure that you and your clients are getting the best deal by avoiding these three pitfalls.
  3. Trading

    Introduction to Level II Quotes

    Find out what's happening in a given stock with this service showing Nasdaq market makers' best bid and ask prices.
  4. Trading

    Basics of the Mechanics Behind Electronic Trading

    Once associated with shouting traders and wild hand gestures, now statistics and programmers rule.
  5. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks, bonds and other securities are traded.
  6. Trading

    An Introduction To Securities Markets

    The global securities market is constantly evolving. Discover the most popular market structures currently in use.
  7. Investing

    The 4 Ways To Buy And Sell Securities

    Know the four main avenues of buying and selling investment instruments.
  8. Trading

    Pick the Right Brokerage Account for Options

    Follow these steps to pick the right options brokerage account depending on your trading needs.
  9. Trading

    How to pay your forex broker

    Three types of commissions are used in this market. Learn how to get the best deal.
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. Quote driven and order driven markets: What's the difference?

    The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask ... Read Answer >>
  3. Where can I purchase options?

    In the United States, all options contracts go through one of several options exchanges. An investor must have an account ... Read Answer >>
  4. 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 >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center