What Stock Market Makers Do
A market maker provides buy and sell quotations under the rules of a particular market or agreement. It can supply liquidity while managing inventory, adverse-selection and execution risks.
How it works
The bid is a quoted purchase price and the ask a sale price. Spreads may compensate for several risks and costs, but not every displayed quote belongs to a designated market maker. Obligations, permitted behavior and transparency vary by venue. Providing a quote does not guarantee unlimited execution size.
Worked example
A dealer quotes 99.95 bid and 100.05 ask. Buying 100 shares at the bid and later selling at the unchanged ask would create 10 gross spread revenue. If the price falls before inventory is sold, the dealer can lose more than that. The spread is not a guaranteed profit and does not prove manipulation.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Fast markets, hedging costs and thin demand can widen quotes. Retail traders cannot infer a dealer’s inventory or intent from one candle. Review execution quality rather than assuming that any loss must have a specific counterparty explanation.
Knowledge check
Is every trade against a market maker?
Read the explanation
No. Orders can match other investors or different liquidity providers, depending on venue and routing. Counterparty identity is not generally established by the price chart.
References and further reading
- SEC Investor.gov: stocks, ownership and risks
- SEC: company filings and financial reports
- SEC: beginners’ guide to financial statements
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.