What Market Makers Actually Do, and How They Get Paid

When you click buy at three in the morning and the order fills instantly, someone was on the other side. In most markets, most of the time, that someone is a market maker.

Understanding what they do and how they earn explains spreads, why liquidity feels abundant right up until it isn't, and why "commission-free" trading is not free.

The job

A market maker commits to quoting two prices continuously in a given instrument:

• A bid — the price at which it will buy from you.
• An ask — the price at which it will sell to you.

The ask is always higher. That gap is the spread, and it is the compensation.

Crucially, the market maker is not trying to guess direction. Its business is turning over inventory rapidly and capturing a tiny margin many thousands of times, while holding as little exposure as possible. A market maker with a strong directional view has stopped making markets and started speculating.

Why the spread has to exist

The spread looks like a toll on your trading. It is payment for a genuine service and a genuine risk.

When you sell, the market maker buys — whether or not it wants that position. It now holds inventory it must offset, and between acquiring and offsetting it, the price can move.

Worse, it faces adverse selection. Some counterparties know something. If a piece of news is about to break, the informed trader hits the market maker's quote, and the market maker is left holding a position that is already wrong. The spread is priced to cover these losses out of the many small gains from uninformed flow.

That framing explains everything about when spreads widen.

When spreads widen, and why

Condition	Effect	Reason
Deep liquid instrument	Very tight	Easy to offset, low inventory risk
Thin instrument	Wide	Hard to offset without moving the price
Around scheduled news	Very wide	High probability the next trade is informed
Market stress	Wide, sometimes extreme	Inventory risk enormous, hedges unreliable
Quiet overnight session	Wider	Fewer participants to offset against

The pattern is consistent: spreads widen precisely when you most want them tight. This is not opportunism. It is the price of risk rising, and if market makers did not widen quotes they would simply stop quoting.

Why liquidity vanishes in a crisis

This is the most important practical point, and it catches people out repeatedly.

Market makers are not obliged to quote at any particular size or price. Their commitment is commercial, not moral. When volatility spikes and hedging becomes unreliable, the rational response is to widen quotes dramatically and shrink the size they will trade.

The result is that liquidity is not a property of an instrument. It is a service being provided, and it can be withdrawn. A market that traded millions of units at a one-tick spread on Monday can have almost no depth on Wednesday.

Every risk model that assumes you can exit at the last quoted price has this backwards. Depth in calm conditions tells you very little about depth in a crisis — which is exactly when you would need it.

Market maker versus broker

Worth separating, because the words get used loosely:

• A broker acts for you. It executes your order by finding a counterparty, and is generally obliged to seek best execution.
• A market maker is the counterparty. It takes the other side onto its own book.

Some firms do both. That creates an obvious conflict — a firm that profits when you lose has an interest that diverges from yours — which is why regulators require disclosure and, in many jurisdictions, structural separation. When choosing a broker, it is worth knowing which model it uses.

Payment for order flow

Modern retail brokers frequently route customer orders to a specific market maker in return for payment.

The market maker will pay for retail flow because it is, on average, uninformed — less likely to be trading on information that will immediately move the price against them. That flow is more profitable to trade against than institutional flow.

This is what funds commission-free trading. It is not a scandal in itself, and it is disclosed. But it explains why zero commission is not zero cost: the cost has moved from a visible line item into your execution price, where you cannot easily measure it. Some jurisdictions have banned the practice; others permit it with disclosure.

What this means for you

Trade liquid instruments where possible. Tighter spreads and deeper books mean lower cost and more reliable exits.

Use limit orders. A limit order lets you sit on the bid rather than crossing the spread — you provide liquidity instead of paying for it.

Avoid the widest windows. Scheduled news, session opens, thin overnight hours.

Never assume you can exit at the screen price. Especially in size, and especially in stress. The quote is an offer for a certain quantity, not a guarantee for yours.

The bottom line

Market makers exist because someone must be willing to trade when you want to, and that willingness costs money to provide. The spread is that cost, and it rises with risk.

The consequence worth internalising is that liquidity is a service, not a feature. It is most abundant when you need it least, and it thins out exactly when it matters — which is why position sizing, rather than the presence of a stop order, is what actually determines whether you can get out.

This article is educational and is not financial advice. Trading carries a high risk of loss.