What Is a Market Maker? Who They Are and Why Exchanges Need Them
When you click “Buy,” there's often a market maker on the other side. Here's who they are, how they make money, and why trading would cost more without them.
Who they are
A market maker is a participant who constantly keeps both buy and sell orders in the order book. Usually it's a professional firm with an agreement with the exchange or with the coin's project.
How they make money
On the spread, the difference between the buy and sell price. For example, they buy at $99.90 and sell at $100.10. Each trade earns pennies, but there are a huge number of trades. Exchanges often give market makers reduced fees.
Why they're needed
| With a market maker | Without a market maker | |
|---|---|---|
| Spread | Narrow | Wide |
| Market order | Close to the current price | Heavy slippage |
| Liquidity | High | Low |
Myths
- "The market maker is hunting my stop." Your order is usually far too small to move the market for. Stops get hit by normal volatility when they're placed too close.
- "They know where the price is going." Their job is the spread, not the direction.
How exchanges, brokers and other participants fit together is covered in the lesson market infrastructure. How to choose a platform with good liquidity is in the article how to choose a crypto exchange.
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- A market maker keeps both buy and sell orders.
- They earn on the spread, not on direction.
- Thanks to them, spreads are narrower and trading is cheaper.
Frequently Asked Questions
Does every coin have a market maker?
Major coins on big exchanges usually do, often more than one. Small coins may not have one, which is why their spreads are wide.
Can a market maker manipulate the price?
An honest market maker works under an agreement and the exchange's rules. But manipulation does happen with small, illiquid coins; it's one of the risks of such assets.
Can a retail trader be a market maker?
Technically anyone can place limit orders, and then you're a “maker” in terms of fees. But professional market making requires a lot of capital and infrastructure.
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