Market makers are compensated for the risk of holding assets because they may see a decline in the value of a security after it has been purchased from a seller and before it's sold to a buyer.
Consequently, market makers commonly charge the aforementioned spread on each security they cover. For example, when an investor searches for a stock using an online brokerage firm, it might observe a bid price of $100 and an ask price of $100.05. This means that the broker is purchasing the stock for $100, then selling it to prospective buyers for $100.05. Through high-volume trading, small spread adds up to large daily profits.
Market makers must operate under a given exchange's bylaws, which are approved by a country's securities regulator, such as the Securities and Exchange Commission in the U.S. Market makers' rights and responsibilities vary by exchange, and by the type of financial instrument they are trading, such as equities or options.
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