marketmaking

Market making is a trading activity in which a firm or trader quotes both a bid and an offer for a security or other asset and stands ready to buy or sell at those prices. By providing continuous two-sided quotes, market makers supply liquidity and depth, helping other participants execute trades with less delay and tighter spreads. They typically trade as principal, aiming to earn a profit from the difference between the bid and ask prices while managing the risk of holding inventory.

A market maker earns revenue from the bid-ask spread and may receive exchange rebates or other incentives. They carry inventory risk, including the risk that prices move against their holdings, and adverse selection risk, where more informed traders trade against their quotes. To manage these risks, market makers use inventory targets, hedging strategies, and dynamic pricing that adapts to volatility, volume, and recent order flow.

Market making operates across asset classes and venues, including equities, options, futures, fixed income, and increasingly crypto markets. In many regulated markets, designated market makers or market maker programs require firms to maintain minimum quotes and provide liquidity during trading hours. Electronic market making relies on algorithms and low-latency systems to update quotes rapidly and to manage risk in real time.

By increasing liquidity and facilitating price discovery, market making can reduce trading costs for others and improve market efficiency. However, it also concentrates risk in the market maker's hands, and firms must comply with applicable rules on fair dealing, capitalization, and surveillance to prevent manipulation and other abuses.