A market maker is a special type of broker whose function it is “make” the market for a particular stock. The market maker will hold a certain number of stock shares in his or her inventory for the express purpose of being able to sell them to the person bidding to purchase them, or will add to his or her inventory by purchasing stock from a seller offering stock shares. In some cases, the market maker may just match up the buyer and seller of the stock shares.
A market maker takes no commission on the sale, but instead makes a profit from the difference between the bid and ask price. The potential seller of the stock sets the price at which the share will be sold; this is the ask or asking price. The potential buyer of the stock will offer or bid a price at which the stock will be purchased. These two prices are rarely equal, and the market maker will only make a trade when there is sufficient difference to yield a profit in the sale. On heavily traded stocks, in which hundreds of thousands of shares trade in a single day, the market maker can still make a handsome profit even if this difference is very small.
The NASDAQ market is composed of over 300 market makers. Since a market maker makes a profit on every sale, whether the market goes up or down, the right to be a market maker on a market like the NASDAQ is worth a great deal of money. The opportunity to become a market maker is very rare, and usually a purchased right. It is not possible simply to decide to become a market maker and start a business as such.
To ensure an efficient and effective market, there are on average 14 market makers per stock on the NASDAQ exchange. Each market maker competes with the other market makers for each stock deal that is proposed. The intention is that, in this way, the market remains competitive and fair for everyone involved. The New York Stock Exchange has dealers who fill similar roles. However, on the New York Stock Exchange, these dealers are referred to as market specialists and not market makers, though they serve the exact same purpose.
