What is the role of a 'market maker'?

A market maker plays a crucial role in the financial markets by actively quoting two-sided markets for a specific security. This means they simultaneously provide buy (bid) and sell (ask) prices for that security, enabling other traders to execute transactions readily. By doing so, market makers enhance market liquidity, ensuring that there are always buyers and sellers available, which contributes to smoother and more efficient trading.

The liquidity provided by market makers is vital, especially in less frequently traded securities where the number of buyers and sellers may not be sufficient to ensure that trades can take place quickly. This function helps to narrow the bid-ask spread, thus facilitating better pricing for all market participants. Additionally, market makers assume the risk of holding inventory of securities, which allows them to respond to market demand and supply dynamics promptly.

In summary, the defining characteristic of a market maker is its responsibility to maintain continuous two-sided quotes in a security, thus fostering liquidity and stability in the marketplace.