Who Are Market Makers?

Market Makers

A market maker is a professional participant in stock exchange trading who has entered into an agreement with the exchange to maintain price levels for certain financial instruments. Market makers are obligated to maintain active trading on the platform and conduct transactions with other market participants.


How to identify a market maker? They include central and commercial banks, large funds, brokers, and private investors. Based on their impact on the market, they are divided into two types.

Institutional. Organizations that maintain a balance between demand and supply, prices, and trading volumes under an agreement with the exchange.

Speculative. Participants capable of unilaterally influencing price fluctuations using large trading volumes of assets.

Market Maker Functions

Among the key responsibilities of market makers, the following are usually highlighted:

  • Maintain quotations within a certain range.
  • Ensure liquidity.
  • Prevent price gaps.
  • Support trading volumes on the exchange.

A market maker immediately places orders for both buying and selling. They can be described as an intermediary between the buyer and the seller. In the most liquid instruments and where there is a market maker, your transaction is likely to be with them.

Market makers play a significant role in situations when the market is dominated by buyers or sellers. For example, negative news is released, causing a company’s quotes to plummet. Investors start selling en masse, and at this moment, the market maker steps in – they are obligated to place buy orders. Conversely, when a stock is rising and no one is selling, they must place sell orders.

Yes, market makers incur losses from unfavorable transactions when the price rises or falls sharply. Their primary task is to balance supply and demand and maintain liquidity, not to make money.

In addition to creating liquidity in stocks, market makers enhance the accessibility and attractiveness of securities. They also help set the opening price at the start of trading.

Why They Do It ?

Market makers also earn money in the market, and they have several ways to do so.

  • Spreads. There is a certain difference between the buying and selling price – the spread. Market makers earn income in the form of this difference since they have positions in both directions and transact with both buyers and sellers.
  • The exchange pays market makers, usually a small fraction of the commissions it receives.
  • To ensure trading volumes meet exchange standards, the market maker receives data on the order book – a list of all buy and sell orders, showing their prices. They also see pending orders (stop orders). All this data can be used to build algorithms and profitable trades based on volumes.
  • To further reduce risks, market makers use arbitrage – that is, they earn on the difference in quotations from different exchanges or different instruments with the same asset (futures on stocks and the stocks themselves). Also, during sharp price jumps, a market maker may increase their position but incur a loss – later, they can average out and sell the asset when the value normalizes.

How to Identify a Market Maker

Although many view the theory of behind-the-scenes games of financial magnates with skepticism, there are certain signs of overly suspicious market behavior that logically cannot be explained.

Drawing a parallel with political shadow governance schemes, traders often have an almost cinematic image of a certain individual, a business shark, manipulating the market and emptying the pockets of other participants. Hence, the attitude towards information about him. There is some truth in all this – money is indeed being shaken out, but the role of magnates is played by solid financial organizations. Such as investment companies, hedge funds, and major banks.

Market makers craft a visual narrative on trading charts, but this portrayal is often a façade. Their aim is to entice traders to act, making them risk their capital based on what the market makers want them to see. They prefer traders to be heavily reliant on indicators and candles, rather than seeing the bigger picture.

Most trading indicators are freely available, and market makers are well aware of how traders interpret these indicators. They also know how traders might react to the free training provided by brokers. The primary job of market makers is to accumulate orders and then move the market to take profits. For them to profit, they need to persuade traders to sell to them or buy from them. If they want to buy, they need to convince traders to sell, and vice versa.

Market makers often hold prices in a tight range for extended periods to accumulate as much as possible. They might create false breakouts or chart patterns like flags, triangles, or head and shoulders to mislead traders. Their objective is to be on the opposite side of every peak movement, accumulating all they can in preparation for future market moves.

It’s not rocket science. Market makers have a plan, a strategy, and they execute it. They accumulate orders before a profit release phase. They accumulate, manipulate, execute orders, raise and lower prices, and then release them as part of the profit extraction phase.

In essence, market makers aim to catch traders off-guard at critical moments, squeeze them, and induce losses. They want losses to become unbearable, forcing traders to exit. Once market makers switch to the other side of the trade, they reap significant profits. They might trigger stop-losses and clear pending orders, often in the form of a spike or stop hunt. Essentially, they clear all pending orders, either getting traders into or out of trades by hitting their stop-losses. The success of the market maker’s business model is driven by the fact that a significant percentage of retail traders are in losing positions. This cycle of “entice-trap-shift” is repeated over and over. Knowing where the price is in the market maker’s cycle at any given time allows traders to anticipate the next move.