# Market Makers and Liquidity Providers > Market makers quote prices to buy and sell all day, earning the spread. Learn how they make money, manage risk, why they matter and the myths about them. Source: https://learn.tradelabsai.com/market-structure/market-makers/ Track: Market Structure · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Market Makers and Liquidity Providers", https://learn.tradelabsai.com/market-structure/market-makers/ A market maker is a firm or trader that continuously quotes both a price to buy (the bid) and a price to sell (the ask) for an asset, standing ready to trade with anyone who wants to. Market makers are the reason you can usually buy or sell instantly, even when no natural buyer or seller happens to be there at that moment. They earn the spread between their bid and ask, in exchange for taking on the risk of holding inventory. ## How market makers make money **Example: Earning the spread** A market maker quotes a stock at $25.00 bid and $25.02 ask. A seller hits the bid, so the market maker buys 500 shares at $25.00. A minute later a buyer lifts the offer, and it sells 500 shares at $25.02. It made $10, two cents per share, without needing a view on where the stock is going. Repeat that millions of times a day across thousands of stocks and the business adds up. In practice, prices move between the two trades, so market makers also earn or lose on inventory. Their goal is to keep inventory small and balanced, earning spreads while limiting directional risk. ## Who the market makers are | Market | Typical market makers | |---|---| | US stocks | Electronic trading firms and wholesalers that internalise retail orders | | Options | Specialised options trading firms, sometimes designated market makers on exchanges | | Futures | Proprietary trading firms | | Forex | Banks and non bank liquidity providers | | Crypto | Specialist crypto trading firms, sometimes paid by token projects or exchanges | | ETFs | Authorised participants and lead market makers | Some exchanges designate official market makers with obligations, such as keeping quotes within a maximum spread, in return for benefits like lower fees. ## How market makers manage risk - **Skewing quotes:** if they have bought too much, they lower both bid and ask to attract buyers and discourage more sellers. - **Hedging:** offsetting exposure with related instruments, such as index futures or, for options market makers, the underlying stock. See [Delta Hedging](https://learn.tradelabsai.com/options/delta-hedging/). - **Widening spreads** when volatility or uncertainty rises. - **Pulling quotes** during extreme events, which is why liquidity can vanish suddenly. - **Predicting short term moves** to avoid being picked off by better informed traders. ## Why markets need them - **Immediacy:** you can trade now instead of waiting for a natural counterparty. - **Tighter spreads:** competition between market makers narrows the gap between bid and ask. - **Continuous prices,** even in quieter assets. - **Liquidity for funds and ETFs,** keeping ETF prices close to their holdings. ## Myths and realities Market makers are often blamed for every bad fill or stop that gets hit. The reality is more nuanced: - They profit mainly from spreads and volume, not from betting against individual retail traders. - Prices often dip to levels where many stops sit because liquidity is concentrated there and many participants trade those levels, not because a market maker sees your specific stop. - Real abuses do happen, and regulators fine firms for misconduct, but routine price moves are usually just supply and demand. See [Market Maker Manipulation: Myth and Reality](https://learn.tradelabsai.com/smart-money/market-maker-manipulation/). ## Market makers and options Options market makers hedge the options they sell or buy by trading the underlying stock. When they are short many options, their hedging can amplify price moves; when long, it can dampen them. Traders who watch dealer positioning track this as gamma exposure. See [Dealer Gamma Exposure](https://learn.tradelabsai.com/options/dealer-gamma-exposure/). ## Frequently asked questions ### What does a market maker do? It continuously quotes buy and sell prices, providing liquidity and earning the spread while managing the risk of its inventory. ### Do market makers trade against me? They are the counterparty to many trades, but they mainly aim to earn spreads and stay balanced, not to take directional bets against individual customers. ### Can anyone be a market maker? Anyone can post limit orders on both sides, but professional market making requires capital, fast technology and sophisticated risk management. See [Market Making](https://learn.tradelabsai.com/strategies/market-making/). ## Sources - Wikipedia, [Market maker](https://en.wikipedia.org/wiki/Market_maker) ## Continue learning - Next lesson: [The Order Book and Market Depth](https://learn.tradelabsai.com/market-structure/the-order-book-and-market-depth/) - Previous lesson: [Prime Brokers](https://learn.tradelabsai.com/market-structure/prime-brokers/) - Related: [Prime Brokers](https://learn.tradelabsai.com/market-structure/prime-brokers/): Prime brokers provide hedge funds and professional traders with financing, securities lending, custody and execution. Learn what they do and the risks involved. - Related: [Bid-Ask Spread](https://learn.tradelabsai.com/markets/bid-ask-spread/): The bid-ask spread is the gap between the best price to buy and the best price to sell. Learn how to read it, what it costs you and how to pay less of it. - Related: [Liquidity](https://learn.tradelabsai.com/markets/liquidity/): Liquidity is how easily you can trade without moving the price. Learn the signs of a liquid market, how illiquidity costs you and when liquidity disappears. - Related: [Market Making](https://learn.tradelabsai.com/strategies/market-making/): Market making quotes both a buy and a sell price to earn the bid ask spread. Learn how market makers manage inventory, adverse selection and risk. - Related: [Market Maker Manipulation: Myth and Reality](https://learn.tradelabsai.com/smart-money/market-maker-manipulation/): Do market makers hunt your stops? Learn what market makers actually do, which forms of manipulation are real and illegal, and what explains moves that feel rigged. - Related: [Fill Probability and Queue Position](https://learn.tradelabsai.com/orders/queue-position/): Your place in the order queue decides whether a limit order fills. Learn how queues work, how to estimate fill probability and why fills can be a warning sign. - Related: [Dealer Gamma Exposure](https://learn.tradelabsai.com/options/dealer-gamma-exposure/): Dealer gamma exposure estimates how option dealers' hedging may dampen or amplify moves. Learn how GEX is calculated, what it suggests and its big limitations.