November 26, 2025
4 mins read
A market maker is a person or company that is always in the market and gives two-way pricing for a security: a "bid" (a price to buy) and an "ask" (a price to sell). They need to be ready to take the opposite side of your exchange. This makes sure that investors can nearly always purchase or sell a security right away, even if no one else is present at that particular moment.
By holding an inventory of the security and always quoting these prices, market makers help keep the market stable and smooth. Their continuous presence creates essential liquidity, which is just a measure of how easily an asset can be bought or sold. This is especially critical for stocks with low trading volume, as it prevents wild price swings.
A market maker is, in plain words, a person or business that helps to "make the market." They act as a ready and willing counterparty, ensuring the exchange mechanism functions efficiently for all other investors, from large institutions to everyday retail traders.
Market makers are the backbone of the financial markets since they make sure that there are always quotations accessible for investors to use. Their major job is to keep the market liquid by always giving buy and sell prices for a security, no matter how much demand there is for it at the time.
This quote-based presence lets traders take positions with less slippage and cuts down on price gaps. The market makers should be prepared to accept the other side of a trade so that the market can be stronger and trading can be easier, regardless of the direction of the market, whether it is up, down or sideways.
To deepen the order book, exchanges frequently hire market makers to help set prices. They allow dealers to secure decent prices and manage risk through the maintenance of safe stock.
Market makers are also required to adhere to some quotation rules, including minimum levels of volumes and maximum spread requirements. These regulations ensure that they, in fact, improve the trading ecosystem.
Their input is particularly essential when the proper price is difficult to determine, the market is volatile, or there are few participants. So, market makers are responsible for maintaining markets that run smoothly, efficiently, and fairly for all players, both structurally and transactionally.
Market makers make money primarily through the so-called bid-ask spread. The price they are willing to pay on a security is the level at which they accept to buy it, and the price at which they are willing to sell it is the ask. The margins between these two prices are very low. They want to make a small profit on each transaction by always purchasing at the lower bid price and selling at the higher ask price.
For instance, a market maker can say that a stock is worth ₹100 (their bid price) and ₹100.10 (their ask price). They make ₹0.10 per share if they can acquire it from one investor for ₹100 and sell it to another for ₹100.10. This process happens dozens or even millions of times a day across several equities, so even little gains may add up to big money.
Exchanges typically compensate market makers for their work in addition to the spread. These rewards are a strategy to get them to supply liquidity, especially for assets that don't trade very regularly. The market maker has to satisfy certain standards to get these fees. For example, they have to keep a particular spread or be accessible to trade for the majority of the day.
This business, on the other hand, is not without danger. Market makers need to have a stock of assets on hand, and if the market suddenly changes, the value of those holdings might decline, which can lead to losses. There is no assurance of making money. To protect themselves from volatility, they have to be very good at controlling their risk, which they frequently do by adopting hedging tactics.
Market makers are present and work differently on different exchanges throughout the world, including in the United States. SEBI has established rules to be followed by market makers in the NSE and the BSE of India. In order to ensure the sufficiency of liquidity within all the assets, these companies are required to quote a minimum volume in specified bid-ask spreads.
As an illustration, the NSE Emerge and BSE SME platforms require market makers to attract more small and medium-sized enterprises to them. This is part of their quote responsibilities, and they must be present throughout the trading hours and maintain an active spread.
NASDAQ, among other exchanges, allows more than a single market maker of a specific security worldwide. This fosters healthy competition as well as helps people get improved prices. NYSE, however, has Designated Market Makers who perform the predetermined role of regulating the flow of orders and the price of a particular stock.
Every trade also establishes its reward and punishment mechanism depending on its performance. Refunds or reduced transaction costs are a reward to the suppliers of the reliable quotation. These systems ensure that interest rates are low in the market and that market makers are also active even during a volatile market.
The market maker definition varies somewhat from exchange to exchange, though it remains crucial to ensure that the trading environment remains stable and liquid for all.
Criteria | Market Makers | Designated Market Makers |
Appointment | Voluntary registration with the exchange | Officially assigned by the exchange |
Number per Security | Several entities can provide quotes for the same security. | Usually, one for each listed security |
Obligation to Quote | Encouraged, and sometimes rewarded | Mandatory quoting during all market hours |
Scope of Role | Provide general liquidity | Make sure that both liquidity and price movement are orderly. |
Risk | Absorb inventory and market risk | In charge of keeping markets in order |
Exchange Type | Common on NASDAQ, BSE | Common on the NYSE and select Indian segments |
Profit Model | Make money from the difference between the bid and ask prices and the amount of trading. | A similar model with extra pay for duties |
Regulatory Oversight | Exchange guidelines and SEBI in India | Closer monitoring because of official designation |
Nature of Activity | Quote freely on a range of securities | Given specific securities to quote on a regular basis |
Inventory Requirement | Holds stock to fulfil obligations | Maintains sufficient stock to manage price gaps |
Financial markets require the existence of market makers. Their responsibility is ensuring that there is liquidity, narrowing the price spread and ensuring that trading is made easy in any type of market conditions. They provide proper quotes as well.
They simplify the buying and selling of assets by assuming calculated risks and making spread profits. All the market makers contribute to making the market more accessible and efficient, regardless of whether they trade in the large exchanges or in small marketplaces.
The concept of market makers can make you understand the way the modern markets operate.
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A market maker ensures there is always a buyer or seller available by providing continuous bid and ask quotes. This supports efficient trading and helps maintain liquidity in financial markets, especially when natural market participants are not actively placing orders on both sides of a transaction.
Market makers trade directly from their own inventory, while brokers act as intermediaries, executing trades on behalf of their customers. Consistently quoting prices and providing liquidity even in the absence of counterparties is their responsibility. During various stages of market activity, the financial markets are stabilised by this direct participation.
Yes, market makers are essential to maintaining steady liquidity because they are always prepared to buy or sell at quoted prices. Particularly in low-volume situations, their presence reduces the bid-ask spread, facilitates smooth trading, and enables investors to enter or exit positions without experiencing significant price disruptions.
Market makers earn from the small difference between the bid and ask prices, known as the spread. Over time, and across high trading volumes, these margins accumulate. In addition, some exchanges may offer incentives for maintaining liquidity and fulfilling quoting obligations in financial markets.
In India, market makers operate under SEBI guidelines. These include mandatory quoting norms, spread thresholds, and volume requirements. Exchanges such as the NSE and BSE monitor their activity to ensure orderly trading and adequate liquidity across all segments, especially in small- and mid-cap securities.
The role of a market maker is to ensure continuous quoting of buy and sell prices, regardless of market demand. By holding inventory and participating consistently, they maintain smooth trading conditions, helping to promote transparent financial markets with better price discovery for investors.
Activity supports orderly financial markets, enhances investor confidence, and guarantees liquidity, even when other participants withdraw. This consistency is vital to prevent gaps and maintain trading efficiency throughout market sessions.
Market makers continuously quote buy and sell prices. They track securities and use their holdings to fulfil orders from the market. By doing this, they enable all participants to trade easily and with liquidity, even during periods of slow activity or sudden market changes.
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