GLOSSARY // Orders & Execution
Market Maker
A market maker is a firm that continuously quotes both a buy price and a sell price in a stock, earning the difference between the two. Quote a bid of $50.00 and an ask of $50.02, buy from sellers at the bid, sell to buyers at the ask, and the $0.02 spread is the revenue — repeated thousands of times a day.
Registered market makers carry obligations: they must maintain two-sided quotes during market hours, which is why you can almost always trade a listed stock instantly. Wholesale market makers such as Citadel Securities and Virtu fill a huge share of retail orders off-exchange, often at prices a fraction of a cent better than the National Best Bid and Offer (NBBO).
The spread is compensation for inventory risk. A market maker holding 50,000 shares when bad news drops eats the loss, so spreads widen exactly when volatility rises — in illiquid small caps the quoted spread can run 1% or more of the share price.
A market maker quotes XYZ at $20.00 x $20.04, 500 shares each side. Over an hour it buys 30,000 shares at the bid and sells 30,000 at the ask. Gross capture: 30,000 x $0.04 = $1,200 — before the losses it takes on the shares it was holding when the stock moved against its inventory.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.