| Market makers are required to “make a market” which means buy and sell the particular security in which they are market makers. However, they are not required to buy and sell at particular prices.
In order to be able to perform their duties, market makers need to hold inventory of the particular security.
Market Making and Flow Trading requires competition for the flow of orders from their clients by displaying buy and sell quotations for a guaranteed number of shares.
The difference between the price at which a market maker is willing to buy, and the price at which the firm is willing to sell it is called the Spread. This spread represents the potential profit a Market Maker can receive on each trade (both the buy and sell side added together).
Once an order is received, the market maker immediately sells from their own inventory or offsets the order with another firm. Market Makers play an important role in the financial markets, acting as catalysts for daily trading and enhancing the liquidity of equities across the market. However, making money from the differences in bid and ask prices is not the only function of market makers. Within their firm, the main priority is to provide liquidity to the firms’ clients, receiving a commission for each trade.
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