Market Making

The role that market making plays in financial markets.

Introduction to Market Making

101 Level Core Concepts Course

Market making is the process of buying and selling assets in the financial markets with the goal of making a profit. Market makers, who are typically large financial institutions, provide liquidity to the market by continuously buying and selling assets. This allows investors to buy and sell securities easily, which helps to keep the market efficient and stable.

Market makers profit from the spread, which is the difference between the price at which they buy securities and the price at which they sell them. For example, if a market maker buys a security for $10 and sells it for $10.05, they will make a profit of $0.05 on the transaction. Market makers also earn money from the commissions they charge for facilitating trades. By continuously buying and selling securities, market makers are able to generate a steady stream of income from the spread and commissions.

A liquidity provider, while similar to a market maker in most respects, is typically a large financial institution that provides liquidity to the market by standing ready to buy or sell securities as needed. Unlike a market maker, a liquidity provider may not be looking to make a profit from the spread, but rather is focused on ensuring that the market has sufficient liquidity to function smoothly.

In decentralized finance, individual users can easily provide liquidity to a decentralized exchange, and earn yield from liquidity mining incentives and fees.