Market Maker
A market maker provides liquidity by continuously quoting bids and asks. Market makers help tighten spreads and deepen the order book.
Definition
A market maker is a participant that provides liquidity by posting both bids and asks in the order book.
What market makers do
• Quote prices on both sides to reduce the bid ask spread.
• Provide depth so traders can execute with less slippage.
• Manage inventory risk as prices move.
Why it matters
Strong market making usually lowers execution costs, including effective spread. Weak market making often leads to thin markets, wide spreads, and unstable quotes.
Common pitfalls
Assuming makers are always present: In uncertainty spikes, market makers may widen spreads or pull quotes.
Confusing “tight spread” with “deep market”: A market can look tight at the top but still have low depth for larger size.