What market makers do

A market maker is a participant that continuously offers to both buy and sell an asset, quoting a price on each side and profiting from the small gap between them. Their function is to be the ready counterparty — so that when you want to trade, someone is already there.

Market makers are the reason most markets feel liquid. Without them you would have to wait for another trader who happens to want the opposite of what you want, at the same time, in the same size. This article explains what market makers actually do, how they earn their keep, and what makes them step back — mechanics only, with no guidance on how to trade around them.

The core job: quote both sides, always

The defining behaviour of a market maker is two-sided quoting. At any moment they post a bid (a price at which they will buy) and an ask (a price at which they will sell), each for some quantity. If you sell, you hit their bid; if you buy, you lift their ask. They take the other side either way.

Because they are always quoting, they are constantly accumulating inventory in one direction or the other. A trader who only ever bought when convinced the price would rise would go broke making markets; the market maker is deliberately indifferent to direction over short horizons. Their edge is not predicting the price — it is being paid to provide immediacy.

How they get paid: the spread

The primary compensation is the bid-ask spread. Suppose a maker quotes a bid of 100.00 and an ask of 100.10. If one trader sells to them at 100.00 and, moments later, another buys from them at 100.10, the maker has bought and sold the same unit and pocketed 0.10 without taking any lasting position. Repeated thousands of times across a day, those tiny margins add up.

In reality the two sides rarely arrive in perfect pairs, so a market maker spends most of its time holding an unbalanced position and managing the risk of it. The spread has to be wide enough to cover three things:

• Inventory risk — the price can move against the position they are stuck holding before they can offload it.
• Adverse selection — some of the traders hitting their quotes know something they don’t, and those trades tend to lose the maker money.
• Operating costs — infrastructure, exchange fees, and capital.

This is why spreads are not fixed. When any of those risks rise, the maker widens its quotes to stay compensated, which is one of the clearest links between risk and the liquidity you can observe in a market.

Managing inventory: the balancing act

The central operational problem of market making is inventory. Every trade the maker fills pushes its position further from flat. A maker that has just bought a lot of an asset is now exposed to its price falling, so it will subtly adjust: nudging its bid lower and its ask lower to encourage buyers and discourage sellers, steering inventory back toward neutral.

This constant re-pricing is why quotes move even without dramatic news — the maker is managing its own book, not signalling a view. Sophisticated makers run models that set quotes as a function of current inventory, recent volatility, and order flow, all aimed at earning the spread while keeping the position small enough to survive a sudden move.

Makers versus takers

Modern venues formalise the distinction between adding and removing liquidity:

Many exchanges use a “maker-taker” fee model that pays a small rebate to orders that add liquidity and charges those that take it. The intent is to reward participants for keeping the book full. You do not have to be a professional firm to act as a maker in this sense — posting a limit order rather than a market order makes you a liquidity provider for that moment.

Market makers in crypto

Crypto has two distinct flavours of market making. On centralised order-book exchanges, it looks much like traditional finance: firms and individuals post two-sided quotes and manage inventory, often across many venues at once. On decentralised exchanges, the role is largely automated — pooled capital priced by a formula fills the same economic function without a human quoting each side. That mechanism is different enough to deserve its own treatment, which we give in how automated market makers work.

One structural point matters across both: market-making is voluntary. There is usually no obligation to keep quoting. When conditions get dangerous, makers can and do widen spreads dramatically or pull quotes entirely, which removes depth precisely when volatility is highest. That withdrawal is a major reason thin markets move so violently.

Adverse selection: the risk that shapes the spread

Of the risks a market maker carries, adverse selection is the most important to understand because it explains so much of how quotes behave. The idea is simple: some of the traders who hit a maker’s quotes know something the maker doesn’t. When bad news is about to move an asset, informed sellers lift the maker’s bid before it can react, leaving it holding inventory that promptly falls. The maker systematically ends up buying just before declines and selling just before rises against these better-informed counterparts.

A market maker cannot tell in advance which orders are “informed” and which are ordinary. So it prices the average: it sets the spread wide enough that the money earned from uninformed flow covers the money lost to informed flow. The more an asset is prone to sudden, information-driven moves, the larger that buffer must be — which is why volatile or news-sensitive assets carry structurally wider spreads even in calm moments.

This also explains the reflex to widen quotes the instant volatility rises. A jump in volatility means the next informed trade could be more damaging, so the maker demands more compensation to keep quoting. The same logic runs in reverse when conditions calm: competition between makers pushes spreads back down toward the floor set by fees and basic inventory risk.

Common misconceptions

• “Market makers set the price.” They quote around where supply and demand already are. If a maker quotes away from the true market, other participants trade against it until its quotes are corrected — and the maker loses money for being wrong.
• “They always profit.” Making markets is profitable on average through the spread, but a maker holding inventory into a sharp move can lose more than many days of spread income. The business is risk management, not a guaranteed margin.
• “They’re the same as ordinary traders.” A directional trader wants the price to move their way. A market maker mostly wants to avoid holding a position at all and to be paid for the round trip.

What this means

Market makers are the plumbing of a functioning market: they convert the awkward problem of “finding someone who wants the opposite of what you want” into an instant transaction, and they charge the spread for it. Understanding them clarifies why spreads widen under stress, why quotes flicker even in calm markets, and why liquidity can evaporate the moment providers decide the risk of quoting outweighs the reward. When you next look at a tight, deep market, remember that its smoothness is a service being actively supplied — not a permanent feature of the asset.