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. Third Market Maker

    A third market maker is a third-party securities dealer who is ...
  3. Ax

    The ax is the market maker who is most central to the price action ...
  4. Inside Quote

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

    Continuous trading is a method for transacting security orders. ...
  6. Firm Quote

    A firm quote is a bid to buy or offer to sell a security or currency ...
Related Articles
  1. Trading

    Market Makers Vs. Electronic Communications Networks

    Learn the pros and cons of trading forex through these two types of brokers.
  2. Trading

    Principal trading and agency trading

    Ever wonder what happens behind the scenes when you buy or sell a stock? Read on to find out.
  3. Trading

    Why limit orders may cost more than market orders

    Learn the difference between a market order and a limit order, and why a trader placing a limit order sometimes pays higher fees than a trader placing a market order.
  4. Retirement

    The Rise of 401(k) Brokerage Accounts

    Many 401(k) plans now allow participants to trade stocks and bonds by offering brokerage accounts inside the tax-deferred plan. Good idea or too risky?
  5. Investing

    Opening Your First Brokerage Account

    Learn what steps you should take before you open your first brokerage account.
  6. Investing

    The 4 Ways To Buy And Sell Securities

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

    The Basics of the Bid-Ask Spread

    The bid-ask spread is the difference between the bid price and ask price prices for a particular security.
  8. Investing

    Analyst Recommendations: Do Sell Ratings Exist?

    Analyst reports can be an investor's best friend - but without knowing how to read them, you won't be able to fully utilize them.
  9. Tech

    What Caused The Flash Crash?

    Investigators are still trying to figure out what went wrong on May 6, but it seems likely that the crash was caused by multiple interlocking failures.
  10. Financial Advisor

    Don't Let Brokerage Fees Undermine Your Returns

    Smart investors don't give away more money than necessary in commissions and fees. Find out how to save.
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. If everyone is selling in a bear market, does your broker have to buy your shares ...

    Learn about who the counterparty to your trades is, and how your broker functions during a market sell off. Read Answer >>
  4. 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 >>
Trading Center