What Is a Market Maker? How Liquidity Providers Quote, Hedge and Earn the Spread

A market maker is a firm that stands ready to buy and sell a security for its own account, quoting a bid and an ask together so others can trade at once.

Many trades in liquid markets have a market maker on one side, and the person on the other side usually cannot tell. This page covers what the term means in US securities law, how a market maker earns the spread and what eats into it, the main kinds of market maker in stocks, options, crypto and prediction markets, why options market makers hedge and how that hedging shows up in dealer gamma figures, and what public data can and cannot reveal about them. It is descriptive throughout.

What a market maker is

The US Securities Exchange Act defines a market maker as, among other things, any dealer who, with respect to a security, holds himself out "as being willing to buy and sell such security for his own account on a regular or continuous basis", by entering quotations in an inter-dealer system or otherwise. Two parts of that definition carry the idea. The firm trades for its own account, so it is a principal that takes the other side of a trade, not a broker passing an order along. And it does so regularly or continuously, so a buyer or seller can trade at the quoted prices without waiting for someone with the opposite need to arrive.

In practice that means quoting two prices at once: a bid, the price at which the market maker will buy, and an ask, the price at which it will sell. The gap between them is the bid-ask spread. In an order book, those quotes are resting limit orders on both sides, and how deep the book is at each price decides how far a large order has to reach. That mechanism is worked through on a live example in how to read a prediction market order book.

How a market maker earns the spread, and what eats into it

Take an illustrative stock quoted at 50.00 bid and 50.02 ask, with the market maker on both sides. A seller hits the bid and the market maker buys 100 shares at 50.00. A minute later a buyer lifts the offer and the market maker sells 100 shares at 50.02. It is back to flat, $2 richer before costs. Repeated across many trades a day, that two-cent gap is the gross margin of the business.

Two costs come out of it, and they are why spreads exist in the size they do.

• Inventory risk. Between the two trades, the market maker owns 100 shares it did not choose for their merits. If the price falls five cents before a buyer arrives, those shares have lost $5, more than two round trips of spread. Thomas Ho and Hans Stoll's 1981 paper on optimal dealer pricing models the spread partly as compensation for carrying that inventory, with the dealer adjusting its quotes as its position grows.
• Adverse selection. Some of the people trading with a market maker know more than it does. If sellers who hit the bid tend to be selling because they know the price is about to fall, the market maker keeps buying just before declines. Lawrence Glosten and Paul Milgrom's 1985 paper showed that a spread can arise from this alone, even for a market maker with no inventory concerns: the spread has to be wide enough that gains from uninformed traders cover losses to informed ones.

That is why spreads widen when news is pending or prices are moving fast; the bid-ask spread page covers the fast-market case. The quote reflects what the market maker expects to lose to better-informed traders, not only the cost of standing ready.

The main kinds of market maker

Exchange-designated market makers. On the New York Stock Exchange, a Designated Market Maker (DMM) is assigned to each listed security. The NYSE says DMMs have obligations to maintain fair and orderly markets for their assigned securities, and describes them as operating, by hand and electronically, at the open, at the close and during periods of trading imbalances or instability.

Wholesalers. Many US retail brokers route customer stock orders to wholesale market makers that fill the orders themselves, and some brokers receive payment for that order flow. SEC Rule 606 requires brokers to publish quarterly reports on where they route customer orders, including the net payment for order flow received from each venue, which makes these arrangements visible in aggregate.

Options market makers. A heavily traded underlying can carry thousands of listed option series, each one a strike, expiry and call or put (SPY's chain listed 9,815 in Kresmion's capture for the 30 September 2026 session), far more than natural buyers and sellers could match on their own, so options markets lean heavily on market makers quoting the whole chain. Their hedging is the subject of the next section.

Crypto and prediction-market makers. On venues that run a central limit order book, any user posting resting limit orders provides liquidity, and the venue's fee schedule usually distinguishes makers from takers. Polymarket's fee documentation, at the time of writing, says makers are never charged fees, only takers pay, and that part of those fees funds a maker rebates program meant to encourage deeper books and tighter spreads. Professional firms make markets on these venues, but the role is defined by the order type, not by a registration.

Why options market makers hedge

A market maker that sells a call to a customer loses if the underlying rises. Holding that risk outright would make its results a bet on direction, so it usually hedges: it buys a quantity of the underlying set by the option's delta, the option's share equivalent. Delta changes as the price moves, so the hedge has to be adjusted again and again, and gamma sets how much.

Summed across a whole chain, that rehedging is what dealer gamma exposure estimates. When market makers are net long gamma, their hedging sells into strength and buys into weakness; when they are net short gamma, it does the reverse and can add to a move, the case behind a gamma squeeze. The word dealer in those figures refers mainly to these options market makers, viewed through the positions the model assumes they carry.

Where Kresmion shows market maker activity

Kresmion does not make markets, route orders or hold customer funds. It shows two traces of market making from public data.

For prediction markets, the public pages under /odds for the more actively traded Polymarket markets carry a liquidity block with a recent order-book snapshot: the best bid, the best ask, the spread in percentage points, and the dollar value resting within 1% of the mid price on each side, with the capture time printed. That is the quoted side of whoever is making the market at that moment.

For options, Kresmion's greeks exposure tool models how the hedging of US listed options nets out, name by name, as gamma, delta and other exposures from the end-of-day options chain and prior-session open interest. The gamma snapshot is open to everyone, and the rest of the suite opens with a free account. The figures rest on a stated assumption about which side dealers hold, because open interest does not say who bought and who sold.

What public data cannot show

Neither the order book nor open interest identifies market makers. A resting order on a prediction market or a crypto venue does not say who posted it, and a quote can be cancelled the instant someone reaches for it. Listed open interest has a buyer and a seller behind every contract, and nothing public says which of them is a market maker, which is why every dealer exposure figure, Kresmion's included, is a model built on an assumption. The inventory, hedges and profits of individual market makers are not public, and spread and depth readings are snapshots that can change within seconds.

Key takeaways

Frequently asked questions

Do market makers trade against their customers?

They take the other side of each trade, which is the service they provide, but a market maker's aim is to earn the spread across many trades rather than to win on direction. Most hedge or work off the positions they take on, and the main costs of the business are inventory moves and trading with better-informed counterparties.

What is the difference between a market maker and a broker?

A broker acts as an agent, routing a customer's order to a venue or to another firm to be filled. A market maker acts as a principal, buying or selling from its own account. Some firms do both, in different parts of their business.

What is a designated market maker?

On the New York Stock Exchange it is the firm assigned to a listed security, one per security, with obligations to maintain a fair and orderly market in it. The NYSE describes DMMs as operating at the open, at the close and during trading imbalances.

Can anyone be a market maker on a prediction market?

On an order book venue such as Polymarket, any user who posts a resting limit order is providing liquidity and is treated as a maker for fee purposes. Professional firms quote many markets continuously, but the role comes from the order type rather than from a special registration.

Does dealer gamma data show what market makers are doing?

It shows a model of it. Dealer gamma figures are built from open interest and a stated assumption about which side dealers hold, so they estimate how market maker hedging nets out without observing any firm's actual book.

This page is information, not investment advice.

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Source: Securities Exchange Act of 1934, Section 3(a)(38), 15 U.S.C. 78c(a)(38), https://www.law.cornell.edu/uscode/text/15/78c ; NYSE, market model and Designated Market Makers, https://www.nyse.com/market-model ; SEC Rule 606, 17 CFR 242.606, https://www.ecfr.gov/current/title-17/section-242.606 ; Glosten and Milgrom, "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders", Journal of Financial Economics 14(1), 1985, https://ideas.repec.org/a/eee/jfinec/v14y1985i1p71-100.html ; Ho and Stoll, "Optimal dealer pricing under transactions and return uncertainty", Journal of Financial Economics 9(1), 1981, https://ideas.repec.org/a/eee/jfinec/v9y1981i1p47-73.html ; Polymarket documentation, Fees, https://docs.polymarket.com/trading/fees ; Kresmion prediction market order-book snapshots, modeled dealer greeks exposure and options chain capture (SPY, 30 September 2026 session). The quote example uses illustrative prices.

Kresmion Research.