Market maker
Trader's Glossary · Order flow
Definition. A market participant who continuously quotes buy and sell orders, providing liquidity. It earns mainly from the spread and liquidity-provision rebates.
How it works
A market maker buys at the bid and sells at the ask, trying not to hold large positions. When uncertainty rises, it widens the spread or pulls its orders.
Example
Just before an important data release, market makers pull some of their orders, making the book thinner and the spread wider.
What to watch out for
Market makers' behaviour explains many changes in liquidity, but it says nothing about market direction.
A market maker on an exchange vs a market-maker CFD broker
On an exchange, a market maker is one of many participants in the central order book. On the Warsaw Stock Exchange, “market maker” is a formal role: an investment firm, under an agreement with the exchange, must continuously quote buy and sell orders. On futures exchanges such as the CME, liquidity is provided by, among others, firms in liquidity-provider programmes that compete with one another in the same book.
At a CFD broker operating as a market maker, the broker itself is your counterparty. That's a different situation: your loss can be its revenue. I describe this in the article Why most people lose on CFDs.
What market makers look like in the order book
The DOM doesn't show who's behind an order, but market makers' behaviour can be recognised by a few traces:
- orders placed symmetrically on both sides of the price that move with the market,
- orders that immediately refresh at the same price after a partial fill,
- liquidity being pulled just before macro data, e.g. before an 8:30 AM ET release: the book gets thinner and the spread wider.
Frequently asked questions
- Is the market maker trading against me? On an exchange there's no single counterparty: the market maker is one of many participants and earns from the spread, not from your loss. At a market-maker CFD broker, the broker is your counterparty.
- Is “animator rynku” the same as a market maker? Yes, it's the Polish term. On the Warsaw Stock Exchange it also refers to a specific role under an agreement with the exchange.
See also
Liquidity, Spread, HFT (high-frequency trading).
More in Hetman Capital Club
You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).
Educational content, not investment advice.