Liquidity

Market maker

Market maker is a firm that regularly quotes prices to buy and sell a security, supplying liquidity while managing the risk of holding inventory.

What it means

In a stock market, a market maker posts a bid—the price at which it is willing to buy—and an ask—the price at which it is willing to sell. By quoting both sides, it can make it easier for other participants to trade without waiting for a matching investor order. It is one possible source of liquidity, not a guarantee that any order will fill at the displayed price.

A market maker may earn a spread when it buys at its bid and later sells at its ask, but that outcome is not assured. Prices can move while it holds shares, and it must manage inventory and trading risk. Quotes and available quantities can change. Depending on the market, other participants may also supply liquidity.

How it is calculated

A market maker is a type of participant, not a numerical measure, so there is no formula for calculating a market maker. The measurable concept associated with its two-sided quote is the quoted bid-ask spread:

Quoted spread (US$/share) = ask price (US$/share) - bid price (US$/share)

  • Ask price: the quoted price per share at which the market maker is willing to sell, subject to the quote's available size and applicable market rules.
  • Bid price: the quoted price per share at which it is willing to buy, subject to the same constraints.
  • Quoted spread: the difference between those prices, measured in US dollars per share. Dividing it by the quote midpoint and multiplying by 100 expresses it as a percentage.

A stock's displayed best bid and best ask may come from different participants, so the market-wide spread is not necessarily one market maker's spread. Neither spread alone reveals the eventual execution cost of an order.

Worked example

Suppose, hypothetically, a market maker quotes a bid of US$49.95 for 200 shares and an ask of US$50.05 for 200 shares.

  1. Subtract the bid from the ask: US$50.05 − US$49.95 = US$0.10 per share.
  2. Find the quote midpoint: (US$49.95 + US$50.05) / 2 = US$50.00 per share.
  3. Express the spread relative to that midpoint: US$0.10 / US$50.00 × 100 = 0.20%.

If an immediate buy order for 100 shares trades entirely at that ask, its price is US$5,005, excluding commissions and other costs. That is US$5 above the US$5,000 midpoint value at the time of the quote. It is not a guaranteed fill: the ask or its available size may change before the order executes. An order larger than the 200 shares quoted at that ask might reach other prices or fill only partly.

Why it matters before you trade

A market maker's quote gives a snapshot of a possible trading price and available size, not a promise of continuous liquidity. A wider spread increases the gap between an immediate purchase at the ask and an immediate sale at the bid. The difference is especially relevant when the intended order is large relative to quoted size or typical trading volume.

Check the spread alongside market depth, volume and the order's execution conditions. A limit order controls the worst permitted price but may not fill; an immediately executable order may fill at a different price if quotes move or available shares are insufficient. These are execution trade-offs, not signals about where a stock's price will go.

How PreTrAIde uses it

PreTrAIde does not identify a particular market maker or promise access to its quotes. Its pre-trade analysis estimates the bid-ask spread using a liquidity-tier model with a volatility uplift and a one-tick floor. It also assesses participation in daily volume and estimates market impact. Those measures inform its stock-level and basket-level analysis before the user places an order with their own broker. PreTrAIde is analysis software; it never receives, transmits or executes an order.

Common mistakes

  • Treating the spread as guaranteed profit: a market maker faces inventory risk, price changes and other costs.
  • Assuming a quote covers any order size: displayed quantities may be limited or change before execution.
  • Equating a quoted spread with total trading cost: market impact, changes in the execution price and commissions can also matter.
  • Assuming every best bid and ask comes from one firm: different participants can post the best prices on each side.

Frequently asked questions

How does a market maker make money?

A market maker may capture part of the bid-ask spread when it buys and later sells shares. Price movements, inventory risk and other costs mean the quoted spread is not guaranteed profit.

Is a market maker the same as a broker?

No. A broker handles orders for customers, while a market maker quotes prices at which it is willing to trade; a firm can perform different functions in different contexts.

Does a market maker guarantee that my stock order will fill?

No. A quote has an available size and can change, and an order's fill also depends on its price and execution conditions.

Related terms

Liquidity provider Liquidity provider is a market participant that makes shares available for others to trade, typically by posting a bid to buy, an offer to sell, or both. Bid-ask spread Bid-ask spread is the difference between the lowest displayed price to sell a stock (ask) and the highest displayed price to buy it (bid), measured per share. Order book Order book is a record of currently available buy and sell orders for a security, organized by price and quantity, that shows displayed liquidity at a particular venue or across specified venues. Market depth Market depth is the quantity of buy and sell orders available at different prices in an order book at a particular moment. Liquidity Liquidity is the ability to buy or sell an asset promptly in the desired quantity without substantially moving its price or incurring excessive trading costs. Market impact Market impact is the price movement attributable to executing a trade, as the order consumes available liquidity or prompts other market participants to adjust their prices.

Liquidity

Average daily volume (ADV) Dollar volume Turnover Free float Liquidity risk Illiquid stock Days to liquidate Amihud illiquidity ratio All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.