Glossary
Market Maker
A player always quoting buy and sell prices
A market maker continuously quotes both a buying and a selling price so that trading is always possible. It buys when no one else will and sells when no one else will.
Its income comes from the bid-ask spread — buying at 99.90 and selling at 100.00 to keep ten cents. Each turn is tiny, but repeated tens of thousands of times a day it adds up.
Their presence is what creates liquidity. Being able to sell the moment you want to depends on someone always standing on the other side, and the role matters most in thinly traded securities.
They are especially important for ETFs. When the market price drifts from net asset value, market makers close the gap through arbitrage — which is why ETF prices track their underlying value.
But in extreme stress they withdraw their quotes. When risk becomes too great they stop pricing both sides, and at that moment spreads widen sharply and trading becomes difficult.