Market Making: How It Works & Why Markets Need It 2026

What Is Market Making?

Market making is the business of continuously quoting both a buy price (bid) and a sell price (ask) for a financial instrument, so that other participants can trade whenever they want. A market maker stands ready to buy from sellers and sell to buyers, earning the spread between those two prices as compensation. Without market makers, many securities would be difficult or impossible to trade at any given moment.

Here's the practical version. Imagine you want to sell 1,000 shares of a FTSE 250 stock. You go to your broker, hit "sell", and the order fills within seconds. That instant execution didn't happen by accident. A market maker was sitting on the other side, posting a bid price and willing to buy your shares - even though they didn't particularly want to own them. They'll hold the position briefly and try to sell it at a slightly higher price, capturing the spread.

A market maker who posts a bid of £50.00 and an ask of £50.02 earns £0.02 per share if they buy at the bid and sell at the ask. That two-penny spread, multiplied across millions of shares and thousands of instruments each day, is the fundamental unit of revenue. In 2026, virtually all market making is electronic - algorithms quote prices, manage risk, and execute trades in microseconds, with no human touching individual orders.

Market makers serve an essential function in financial markets. They provide liquidity (the ability to trade without significantly moving the price), reduce bid-ask spreads (lowering transaction costs for everyone), and improve price discovery (helping markets reflect new information quickly). They operate across every major asset class - equities, options, ETFs, fixed income, foreign exchange, and crypto - and on every major exchange in the world.

For a detailed look at the strategies and algorithms market makers actually use, see our market making strategy guide.

---

Why Markets Need Market Makers

Markets need market makers because without them, liquidity dries up, spreads widen dramatically, and trading becomes expensive and unreliable. The difference between a market with active market makers and one without them is stark.

Consider a stock with no market maker. A seller wants to sell 500 shares at £100. A buyer wants to buy 500 shares at £98. Nobody's in between. The seller either waits - possibly for hours - until someone willing to pay £100 comes along, or they drop their price significantly to find a buyer. The spread is £2, which is a 2% round-trip cost just to enter and exit a position. Price discovery suffers because trades happen infrequently and at inconsistent prices.

Now add a market maker. They post a bid of £99.40 and an ask of £99.60. The seller can immediately sell at £99.40 instead of waiting or accepting £98. The buyer can immediately buy at £99.60 instead of paying £100. The spread has collapsed from £2.00 to £0.20 - a 90% reduction in transaction costs. Both the buyer and seller got a better deal, and the market maker earned £0.20 per share for providing this service.

This effect scales across the entire market. Research from the Bank for International Settlements (BIS) and academic literature consistently finds that markets with competitive market making have:

• Tighter spreads - lower costs for every participant
• Greater depth - more size available at each price level, meaning large orders move the price less
• Better price discovery - prices reflect new information within milliseconds rather than minutes or hours
• Lower volatility - continuous two-sided quoting dampens price swings caused by temporary supply-demand imbalances

The 2020 COVID-19 market crash provided a real-world stress test. During the most volatile days in March 2020, some electronic market makers pulled back from quoting - and spreads on even the most liquid US equities widened by 5-10 times their normal levels. When market makers returned, spreads normalised within hours. The episode showed just how dependent modern markets are on electronic liquidity provision.

---

How Market Makers Make Money

Market makers make money primarily through spread capture - buying at the bid and selling at the ask. The three main revenue sources are the bid-ask spread itself, exchange rebates, and informational advantages from observing order flow.

Spread Capture

The core revenue stream. A market maker quotes a bid of £100.00 and an ask of £100.02 on a stock. If someone sells to them at £100.00 and someone else buys from them at £100.02, they've earned £0.02 per share with zero directional risk. When flow is balanced - roughly equal buying and selling - spread capture is almost mechanical profit.

The catch is that flow is rarely perfectly balanced. The market maker accumulates inventory, and if the price moves against that inventory, losses can dwarf the spread earned. This is why market making is fundamentally a risk management problem, not a prediction problem.

Exchange Rebates

Most electronic exchanges operate a maker-taker fee model. Liquidity providers (makers) who post resting limit orders receive a small rebate - typically £0.001 to £0.003 per share on US equity venues - when their orders are filled. Liquidity takers who send marketable orders pay a fee. For a market maker executing tens of millions of shares daily, rebate income runs into millions of pounds per year. Some strategies are specifically designed to maximise rebate capture on venues with generous maker rebates.

Order Flow Information

A market maker quoting across thousands of instruments observes an enormous amount of real-time order flow data. Patterns in that flow - which instruments are being bought, in what size, by what type of counterparty, at what time of day - contain information about short-term price direction. This is different in principle from misusing knowledge of a specific client's order - a distinct regulatory concept - and statistical signals come from aggregate activity across many participants. Large electronic liquidity providers are sometimes described publicly as handling a large share of consolidated equity volume in major markets; any precise percentage fluctuates over time.

---

The Risks of Market Making

Market making carries four primary risks: inventory risk, adverse selection, volatility risk, and technology risk. Any one of these can turn a profitable day into a catastrophic loss.

Inventory Risk

The most fundamental risk. A market maker who buys 100,000 shares at £50.00 is now long 100,000 shares. If the price drops to £49.80 before they can sell, they've lost £20,000 - potentially more than the spread earned on thousands of previous trades. Inventory accumulates naturally because flow is never perfectly balanced, and unwinding large positions without moving the price takes time and skill.

Market makers manage inventory risk through quote skewing (adjusting prices to discourage further accumulation in one direction), hedging with correlated instruments, and strict position limits enforced in real time.

Adverse Selection

Adverse selection occurs when a market maker trades against a counterparty who has better information. If an informed trader knows the price is about to move, they'll trade against the market maker's stale quotes, leaving the market maker on the wrong side. The market maker can't tell in advance whether an incoming order is from an informed or uninformed trader - this asymmetry is the central challenge of market making.

Research by Glosten and Milgrom (1985) showed that even in a competitive market with zero expected profit for the market maker, the spread must be positive as long as there's any probability of facing an informed counterparty. The spread is, in part, insurance against adverse selection.

Volatility Risk

When markets become volatile, the risk of holding inventory increases because prices can move further, faster. During earnings announcements, macroeconomic data releases, or geopolitical shocks, market makers widen their spreads to compensate - or withdraw from quoting entirely. The 2010 Flash Crash and the 2015 Swiss franc de-pegging both saw market makers step back, contributing to extreme price dislocations.

Technology Risk

When your business runs on systems that execute thousands of orders per second, a software bug, hardware failure, or network outage can cause enormous losses in moments. Knight Capital's 2012 technology failure, which lost $440 million in 45 minutes due to a deployment error, remains the most infamous example. In 2026, firms invest heavily in redundancy, testing, and kill switches that can shut down trading within microseconds if something goes wrong.

---

Traditional vs Electronic Market Making

Traditional market making was a human activity. Electronic market making replaced it with algorithms, and the differences between the two are substantial in every dimension - speed, cost, accuracy, and scale.

The Old Model: NYSE Specialists and Floor Makers

Until the early 2000s, market making on exchanges like the New York Stock Exchange was performed by specialists - designated human traders who stood at specific posts on the exchange floor. Each specialist was responsible for maintaining an orderly market in a set of stocks. They'd physically stand at their post, observe the flow of buy and sell orders, and set prices by shouting quotes or writing them on boards.

Specialists had an obligation to maintain a "fair and orderly market" by buying when there were no other buyers and selling when there were no other sellers. In return, they received privileged access to order flow information and the ability to trade for their own account alongside customer orders. This created inherent conflicts of interest - specialists could see pending orders before the rest of the market.

The London Stock Exchange operated a similar system with jobbers until the 1986 Big Bang deregulation, which allowed banks and brokers to combine market-making and agency functions.

The New Model: Electronic Market Making

By the mid-2000s, electronic market making had largely replaced human specialists. The transition was driven by Regulation NMS in the US (2005), MiFID in Europe (2007), and the proliferation of electronic communication networks (ECNs) and multilateral trading facilities (MTFs).

Modern electronic market makers are technology firms that happen to operate in financial markets. They run algorithms that:

• Quote prices across thousands of instruments simultaneously
• Update those prices thousands of times per second in response to new market data
• Manage inventory and risk in real time across correlated instruments
• Execute trades in microseconds from co-located servers inside exchange data centres

The result has been transformative for market quality. Academic research consistently shows that the shift to electronic market making reduced average bid-ask spreads by 50-90% across most markets. Transaction costs for institutional and retail investors fell dramatically. For a deeper look at the technology layer, see our guide to high frequency trading.

---

How Modern Electronic Market Making Works

Modern electronic market making runs on a pipeline of co-located servers, direct market data feeds, algorithmic pricing engines, and real-time risk management systems - all operating within microseconds.

The Technology Stack

Co-location. Market making firms rent rack space inside exchange data centres, placing their servers physically adjacent to the exchange's matching engine. This matters because every metre of cable adds nanoseconds of latency. Firms pay significant fees - often over £10,000 per month per rack - for this proximity. Major exchanges including the London Stock Exchange, NYSE, Nasdaq, CME, and Eurex all offer co-location.

Direct data feeds. Rather than using consolidated data feeds, market makers subscribe to direct exchange feeds that deliver raw order book data with minimal latency. These feeds show every order placed, modified, and cancelled - the full picture of supply and demand. Processing this data in real time is a core engineering challenge.

Auto-quoters. The algorithmic engines that calculate and publish bid and ask prices for each instrument. An auto-quoter takes inputs - the current mid-price, volatility estimate, current inventory, correlation with related instruments, exchange fee schedule - and outputs a bid and ask price. These calculations run continuously, recalculating every time new data arrives. For more on how these pricing algorithms work, see our market making strategy guide.

Real-time risk management. Every trade changes the firm's inventory and risk profile. Risk management systems calculate position exposure, P&L, and Greeks (for options) in real time, enforcing position limits and triggering hedging actions when thresholds are breached. These systems must be as fast as the trading systems themselves - a risk check that adds even a few microseconds is unacceptable.

Smart order routing. When a market maker needs to hedge or unwind inventory, smart order routers determine the optimal venue and order type to minimise execution cost. In fragmented markets where the same security trades on multiple venues, this routing decision is non-trivial.

Speed and Latency

The entire pipeline - from receiving a market data update to having a new quote acknowledged by the exchange - takes between 1 and 50 microseconds at a top firm. For context, a human blink takes about 300,000 microseconds. This speed isn't about being flashy - it's survival. A market maker quoting stale prices gets picked off by faster participants and loses money on every trade.

The latency arms race has driven firms to invest in custom networking hardware, kernel-bypass network stacks (DPDK, Solarflare OpenOnload), FPGA-based trading systems that process data directly in hardware, and even microwave communication links between exchange sites.

---

Market Making Across Asset Classes

Market making operates across every major asset class, but the economics, risks, and technology requirements differ substantially between them.

Equities

Equity market making is the most competitive and fragmented space. In the US alone, stocks trade across more than a dozen venues (NYSE, Nasdaq, BATS, IEX, dark pools). A market maker must quote across all of them, managing the risk that their order is filled on one venue while prices move on another. Spreads on liquid large-caps like Apple or Shell are razor-thin - often a fraction of a penny - so profit comes from massive volume. Citadel Securities and Virtu Financial dominate US equity market making.

Options

Options market making is more complex than equities because options have non-linear payoffs and require continuous delta hedging against the underlying. A market maker quoting options on a single stock might need to manage positions across hundreds of strikes and expiries simultaneously, each with its own Greeks. Firms like Optiver, IMC Trading, and Citadel Securities are the largest options market makers. For a full breakdown, see our options market making guide.

ETFs

ETF market making requires understanding the relationship between the ETF's price and the value of its underlying basket of securities. When the ETF price diverges from the net asset value (NAV) of the basket, market makers arbitrage the difference by buying one and selling the other. This creation/redemption mechanism keeps ETF prices close to fair value. Jane Street and Flow Traders are particularly prominent in ETF market making.

Fixed Income

Bond market making is less electronic than equities, though it's changing rapidly. Historically, bond trading was voice-based and relationship-driven - dealers quoted prices over the phone. By 2026, electronic bond trading platforms like Tradeweb, MarketAxess, and Bloomberg have captured a growing share of volume, particularly in government bonds and investment-grade corporates. But less liquid bonds - high yield, emerging market, structured products - still trade largely by voice.

The key challenge in fixed income market making is the sheer number of instruments. A single corporate issuer might have dozens of outstanding bonds, each with a different coupon, maturity, and credit risk profile. Inventory management is harder because individual bonds are less liquid than equities, and hedging is imprecise.

Foreign Exchange (FX)

FX is the largest market in the world by volume - over $7.5 trillion per day in 2026. Market making in FX is dominated by the major banks (JP Morgan, Citi, UBS, Deutsche Bank, HSBC) and a growing number of non-bank market makers (Citadel Securities, XTX Markets, Jump Trading). The market operates 24 hours a day, five days a week, with no central exchange. Instead, it runs on a network of bilateral dealer relationships and electronic platforms (EBS, Reuters Matching, Currenex).

FX market making requires managing currency risk across multiple pairs simultaneously. A market maker who buys EUR/USD also takes on implicit exposure to every other EUR and USD cross.

Crypto

Cryptocurrency market making has matured significantly since the early days. In 2026, electronic market makers including Jump Crypto, Wintermute, and GSR operate across centralised exchanges (Binance, Coinbase, Kraken) and decentralised exchanges (Uniswap, dYdX). The crypto market presents unique challenges: 24/7 trading with no breaks, fragmentation across dozens of venues with varying reliability, smart contract risk on DeFi platforms, and higher volatility than traditional assets.

---

Top Market Making Firms

The market-making industry is dominated by a handful of technology-driven firms. Here's a brief profile of the largest and most significant in 2026.

Citadel Securities (New York, London, Chicago) - The largest market maker in the world, handling roughly 25% of all US equity trading volume and around 40% of US retail equity volume. Founded by Ken Griffin, Citadel Securities operates separately from Citadel the hedge fund. The firm makes markets in equities, options, fixed income, and ETFs. Known for massive technology investment and aggressive hiring from top engineering and quantitative programmes.

Virtu Financial (New York, Dublin, London) - Publicly traded market maker operating across equities, fixed income, currencies, and commodities. Virtu is famous for its consistency - the firm once reported only one losing trading day across six years. Operates in over 25,000 financial instruments on more than 235 venues globally.

Jane Street (New York, London, Hong Kong) - Around 2,500 employees. While Jane Street is often classified as a prop trading firm, a significant portion of its activity is market making, particularly in ETFs and bonds. The firm is known for its unique use of OCaml as a primary programming language, a deeply collaborative culture, and one of the most difficult interview processes in finance.

Optiver (Amsterdam, Chicago, Sydney, London) - Dutch market-making firm with a strong focus on options and derivatives. Around 1,800 employees. Known for its rigorous quantitative culture and one of the best training programmes in the industry. Optiver trades on every major exchange and has grown its London office considerably.

IMC Trading (Amsterdam, Chicago, Sydney) - Around 1,200 employees. Another Amsterdam-headquartered market maker with deep expertise in options. IMC maintains a lower public profile than some competitors but is highly competitive on technology and compensation.

Flow Traders (Amsterdam, New York, Singapore, London) - Specialises in ETP (exchange-traded products) market making. Around 600 employees. Publicly listed on Euronext Amsterdam, giving unusual transparency into its financial performance. Flow Traders has expanded into crypto market making in recent years.

Jump Trading (Chicago, New York, London, Singapore) - A technology-focused firm that combines market making with systematic trading. Known for heavy investment in low-latency infrastructure, including microwave communication networks between exchanges. Jump Crypto, its digital assets arm, is a major presence in cryptocurrency market making.

---

Designated vs Voluntary Market Makers

Not all market makers operate the same way. The distinction between designated market makers (DMMs) and voluntary market makers matters for understanding how exchanges function and how obligations shape behaviour.

Designated Market Makers (DMMs)

A designated market maker has a formal agreement with an exchange to provide continuous liquidity in specific securities. In return for fulfilling obligations - maintaining a minimum quote size, being present in the order book for a minimum percentage of the trading day, and quoting within a maximum spread - the DMM receives benefits. These typically include reduced exchange fees, priority in the matching queue, and sometimes direct payments from the listed company.

On the NYSE, the DMM programme (operated primarily by Citadel Securities and GTS) requires firms to maintain a fair and orderly market in their assigned stocks. The DMM must provide liquidity even during volatile conditions when voluntary market makers may step back.

European exchanges operate similar programmes. Euronext, the London Stock Exchange, and Deutsche Boerse all have designated market maker or liquidity provider programmes with specific obligations and incentives.

Voluntary Market Makers

Voluntary market makers have no formal obligation to quote. They provide liquidity when it's profitable and can withdraw when conditions deteriorate - during extreme volatility, around news events, or when adverse selection becomes too severe. Most electronic market-making firms operate primarily as voluntary market makers, choosing when and where to deploy capital based on expected profitability.

The tension between designated and voluntary market making plays out during market stress. When voluntary market makers pull back, DMMs are often the last line of liquidity. This happened during the March 2020 volatility spike and the 2010 Flash Crash. Regulators have debated whether to strengthen DMM obligations or create incentives for voluntary market makers to remain active during stress.

---

Market Making vs Proprietary Trading

Market making and proprietary trading are related but fundamentally different activities. The confusion arises because many firms - Jane Street, Optiver, Jump Trading - do both under the same roof.

Market making is about earning the spread by providing liquidity. The market maker doesn't have a view on whether the price will go up or down. They want balanced flow - roughly equal buying and selling - so they can capture the spread without taking directional risk. Revenue is generated from the spread and rebates. Risk comes from inventory and adverse selection.

Proprietary trading is about expressing a view on price direction. A prop trader might go long a stock because their model predicts it's undervalued, or short a futures contract because they expect the underlying to fall. Revenue is generated from correct directional bets. Risk comes from being wrong about the direction.

In practice, the line blurs. A market maker who skews quotes based on a short-term price signal is taking a small directional view. A prop trader who provides liquidity as part of their execution is performing a market-making function. But the core intent differs, and regulators treat them differently.

---

Regulation of Market Making

Market makers operate within a complex regulatory framework that varies by jurisdiction. The major regulatory regimes in 2026 include the SEC and FINRA rules in the US, MiFID II in Europe, and the FCA's oversight in the UK.

United States

Regulation SHO governs short selling and includes a market maker exemption. Bona fide market makers are exempt from the locate requirement (finding shares to borrow before shorting) because their business requires selling short to provide liquidity. This exemption is narrowly defined and regulators actively monitor for abuse.

Regulation NMS (National Market System) requires that orders be executed at the best available price across all venues. This drives the fragmentation of US equity markets across multiple exchanges and alternative trading systems, and it forces market makers to quote across all of them.

The Volcker Rule (part of the Dodd-Frank Act) restricts proprietary trading by banks but explicitly exempts market-making activities. Defining the boundary between permitted market making and prohibited prop trading has been one of the rule's most contentious implementation challenges.

Europe and UK

MiFID II (Markets in Financial Instruments Directive, implemented 2018) introduced specific obligations for algorithmic market makers. Firms that engage in algorithmic market making on EU venues must have formal market-making agreements with venues and maintain continuous quotes during a specified proportion of the trading day. MiFID II also requires algorithmic trading firms to have effective risk controls, including kill switches and message throttles.

The UK FCA (Financial Conduct Authority) maintained most MiFID II obligations post-Brexit, with some divergence. UK-based market makers must comply with the FCA's conduct rules, capital requirements, and reporting obligations. The FCA has shown particular interest in ensuring market makers maintain liquidity provision during periods of stress.

Market Maker Exemptions

Across jurisdictions, market makers receive certain exemptions in exchange for their role in providing liquidity. These include short-selling exemptions (Reg SHO in the US, the EU Short Selling Regulation), reduced exchange fees, and in some cases preferential queue positioning. These exemptions reflect regulators' recognition that market making serves a public good - but they also create the risk of abuse, which is why regulatory scrutiny of market-making activity remains intense.

---

Careers in Market Making

A career in market making typically means joining one of the major electronic market-making firms - Citadel Securities, Optiver, Jane Street, IMC, Virtu, Flow Traders, or similar. These firms hire for three core functions: quantitative trading, quantitative research, and technology.

Quantitative traders are responsible for managing the firm's market-making books, monitoring P&L, adjusting parameters, and making real-time decisions during unusual market conditions. Most quant trader roles at market-making firms require strong mental maths, probability skills, and the ability to think clearly under pressure. Degrees in maths, physics, or computer science are most common.

Quantitative researchers build the models that drive pricing, risk management, and signal generation. This includes fair value estimation, volatility modelling, inventory management algorithms, and alpha signals. A PhD in a quantitative discipline is common but not always required - many firms hire exceptional undergraduates and master's graduates.

Software engineers build and maintain the trading systems, data pipelines, risk management infrastructure, and monitoring tools. At a market-making firm, the engineering is extreme - low-latency C++ or Rust for the trading path, Python for research and analysis, and custom hardware (FPGAs) at some firms. Engineering at a market-making firm is closer to systems programming than web development.

Compensation at top market-making firms is among the highest in finance. A first-year quantitative trader at a firm like Jane Street or Citadel Securities can expect total compensation of £200,000-£400,000 in London (higher in New York). Senior traders and researchers at these firms earn well into seven figures.

For a broader look at the firms and how they compare, see our guide to prop trading firms.

---

Frequently Asked Questions

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

A market maker trades with their own capital, buying and selling securities for their own account to provide liquidity. A broker acts as an intermediary, matching buyers with sellers and earning a commission. When you place an order through a retail broker like Interactive Brokers or Hargreaves Lansdown, the broker may route your order to a market maker (like Citadel Securities) for execution. The market maker fills your order using their own inventory and earns the spread; the broker earns a commission or payment for order flow.

How much money do market makers make?

Revenue varies enormously by firm size and market conditions. Citadel Securities reportedly generated over $7 billion in revenue in 2022, a year of high volatility. Virtu Financial, being publicly traded, reports its financials: the firm generated$1.7 billion in trading income in 2022 and $1.1 billion in 2023 as volatility normalised. Smaller market-making firms might generate tens to hundreds of millions in annual revenue. Profitability depends heavily on volatility - more volatile markets mean wider spreads and more trading opportunities.

Do market makers manipulate prices?

Market makers don't set prices arbitrarily - they respond to supply and demand. Their quotes reflect where they're willing to buy and sell given current conditions, inventory, and risk. That said, market makers do influence short-term price dynamics through their quoting behaviour. If a market maker widens their spread or withdraws quotes, it affects liquidity and can contribute to price swings. Regulators monitor for manipulative practices like spoofing (placing orders with the intent to cancel them to create false impressions of supply or demand), which is illegal in all major jurisdictions.

Can retail traders be market makers?

In the traditional sense, no. Institutional market making requires significant capital, regulatory registration, co-located infrastructure, and sophisticated technology. However, retail traders can engage in a form of market making on decentralised exchanges by providing liquidity to automated market maker (AMM) pools on platforms like Uniswap or Curve. Liquidity providers deposit tokens into a pool and earn a share of trading fees. The economics are analogous - you're providing liquidity and earning a spread - but the risks include impermanent loss, smart contract bugs, and low returns on many pools.

What happens if a market maker goes bankrupt?

Market makers operate with capital buffers and risk limits designed to prevent insolvency, and they're subject to regulatory capital requirements. If a market maker were to fail, the impact would depend on its size and interconnectedness. A major market maker's failure would temporarily reduce liquidity in the markets it served, potentially widening spreads and increasing volatility. Exchanges have circuit breakers and backup liquidity providers to mitigate such scenarios. In practice, large market maker failures are extremely rare - the business model is designed for consistent small profits rather than large speculative bets.

Is market making legal?

Yes. Market making is legal, regulated, and actively encouraged by exchanges and regulators in every major financial jurisdiction. Exchanges offer market-making programmes with specific obligations and incentives. Regulators recognise that market makers serve an essential function by providing liquidity, tightening spreads, and improving price discovery. What is illegal is using the market-making function as cover for manipulative practices - spoofing, layering, front-running customer orders, or abusing the market maker short-selling exemption for purposes other than legitimate market making. For a deeper look at how exchanges are structured, see our market microstructure guide.