The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses

Who pays to market makers?

For IPO's, the issuer company pays to Market Makers with help from the lead managers.

Exchanges also provide incentives for market making.

MERCHANT BANKERS IN MARKET MAKING PROCESS

Merchant banking firms carry out a range of activities that help enterprises mobilize funds from the capital markets.  These services include preparing project reports, advising on the best suitable financing structure, identification of sources for buying or selling shares and negotiating with banks and financial institutions with regard to a project’s viability through detailed analysis of the financial, technical, marketing and commercial viability of the enterprise. In addition, merchant bankers undertake underwriting services for an issue, including registration of the offer document, handling marketing and publicity for the issue, providing underwriting support and listing on the stock exchanges. They also take care of all formalities such as filling up applications and getting approvals from the Government, regulatory bodies or financial institutions.