Market makers are one of the most important players in the financial markets. A market maker is a financial intermediary that buys or sells large amounts of financial securities by continuously quoting bid and ask prices. Traders and investors can access these prices and use them for their daily trading activity. Market makers have the fundamental role to facilitate liquidity on the market, and this is granted by their ability to buy and sell assets. This is why these institutions are often known as ‘liquidity and information providers’. They continuously quote the bid and ask price of assets and make a profit from the bid/ask spread, that is the difference between the bid and ask prices.
A market maker is usually a very large institution, due to the quantity of assets needed to grant the required volume of trading on the market. Thanks to their ability to quote buy and sell prices and executing trades at those prices rapidly, these market participants can generate a clear way to place orders.
The role of market makers derives from the market need of setting prices at levels needed for balancing supply and demand of assets, until an equilibrium is achieved. Even when markets become very volatile, market makers are responsible for market performance, a role which exposes them to a large amount of risk. This is why they make their profits by maintaining a spread on the financial securities that they enable a trader to trade, to compensate for the risk of buying an asset that may devalue.