Market Makers Explained: Who Quotes the Price You Trade At

Somebody has to be willing to trade at every instant, or markets simply would not function. Market makers are the firms that volunteer for that job, and they are paid for it in the spread you cross on every trade.

Market Makers at a glance

What it is and why it works

Imagine a market with no market makers. You decide to buy at 14:32:07. For your order to fill, someone else must independently decide to sell exactly then, in exactly your size, at a price you both accept. Most of the time nobody would, so you would wait, and every price would jump erratically as isolated buyers and sellers happened to meet. That is what an illiquid market looks like, and it is unpleasant to trade.

Market makers solve this by standing in the middle permanently. They post a bid and an ask at all times and commit to trading at those prices. If you want to buy, they sell to you. If you want to sell, they buy from you. They have no view on where price is going and they do not want the position, their business is turning it over. In exchange for providing that certainty they collect the spread, buying marginally below the mid price and selling marginally above it, thousands of times a day.

Two risks define everything they do. The first is inventory risk: if buyers keep hitting their offer, the maker accumulates a large short position it never wanted, and it must hedge or lay that off, usually by skewing its quotes to attract the opposite flow. The second, and more important, is adverse selection. A market maker quoting a tight two-sided price is exposed to anyone trading against it who knows more, and in the seconds around a data release, everyone potentially does. It cannot tell an informed order from an uninformed one until it is too late.

That second risk explains the behaviour traders find most infuriating. Spreads widen and depth disappears in the moments before and after major news not to spite you, but because quoting tightly into an information event is a reliably losing trade for the maker. Liquidity withdraws exactly when volatility arrives, every time, in every market. It is not a glitch in the system; it is the system working as designed. Note that this is a different thing from a retail “market maker broker” which is covered in who is on the other side of my trade.

How to trade it, step by step

1. Stop expecting a fixed price and start expecting a quote. Every price on your screen is an offer from someone willing to trade, valid for as long as they choose to leave it there. Internalising that removes most of the surprise when quotes move or widen between your click and your fill.
2. Trade when makers want to quote. Competition between market makers is what compresses the spread, and competition is highest during the busiest hours for your instrument. The session guide tells you when that is for what you trade.
3. Avoid the windows where makers deliberately step back. The minute either side of a high-impact release, the daily rollover, the last minutes of a session and public holidays are all periods where quoting is deliberately defensive. If you must be in a position then, size for it rather than pretending conditions are normal.
4. Choose limit orders when you want to be the one being quoted to. A resting limit order makes you a passive provider of liquidity rather than a consumer of it, which means you earn the spread rather than pay it, at the cost of not always being filled. On slower strategies that trade-off is usually worth taking.
5. Judge a broker on execution quality, not the advertised quote. The relevant questions are how often orders are rejected, whether slippage runs symmetrically in both directions, and what the effective spread including slippage actually is. A tight quote you cannot reliably trade against is marketing rather than pricing.
6. Read a quote skew as information. When a maker is carrying unwanted inventory it shifts its quotes to attract the offsetting flow. Persistent one-sided pressure at a level, visible as price refusing to move despite heavy trading, often means someone large is absorbing rather than that the level is magic.
7. Expect worse fills in stress, and plan the position around that. Market makers are least present when everyone wants the same thing at once. Any risk plan that assumes an orderly exit during a panic is assuming liquidity that will not be there.

Size every one of those entries with the position size calculator and check the trade is worth taking with the risk/reward calculator before you commit.

The conditions it needs

Normal, competitive conditions

When several makers are competing for the same flow, spreads compress towards their true cost and execution is excellent. This is the ordinary state of a major instrument during its main session, and it is why those hours are where most retail traders should be operating.

Instruments with quoting obligations

On regulated exchanges, designated market makers accept formal obligations to quote a minimum size within a maximum spread for a stated proportion of the day. That produces far more reliable liquidity than a purely voluntary arrangement, particularly in less popular instruments.

When you are the passive side

If your strategy can wait for a fill, resting limit orders let you collect the spread instead of paying it. Over hundreds of trades that difference is substantial, and it is one of the few genuine structural improvements available to a retail trader without changing anything about the analysis.

When you need certainty of execution

The service market makers actually sell is immediacy. If getting out right now matters more than the exact price (a risk event, a stop, a change of view) then the spread is a fair price for something genuinely valuable, and haggling over a fraction of a pip is the wrong instinct.

When it fails

• “Market makers hunt retail stops.” They are generally indifferent to direction and are trying to end the day flat. Price is drawn to stop clusters because that is where resting orders and therefore liquidity sit, anyone needing to fill size goes where the orders are. That is a structural feature of markets, not a plot against you.
• “They can set whatever price they like.” A maker that quotes away from fair value is instantly arbitraged by other participants, which costs it money. Competition, not goodwill, keeps quotes honest. Where competition is genuinely weak (exotic instruments, dead hours) quotes do become worse, which is a reason to avoid those conditions.
• “Widening spreads at news is manipulation.” It is risk management. Quoting a tight two-sided market into an event that will reprice the instrument is an invitation to be run over by better-informed flow. Every venue and every maker does it, all at once, which is precisely why it is not targeted at you.
• Confusing market makers with market maker brokers. A wholesale market maker quotes prices into the market. A retail market maker broker internalises client trades. The words overlap and the businesses do not, and conflating them produces a great deal of confused argument online.
• Assuming last look means you are being cheated. Last look is a disclosed practice in parts of forex where the maker gets a brief window to accept or reject a trade at its quoted price. It exists because of latency and it can be abused, regulators have said so, but it is not by itself misconduct. Rejection rates are the number to look at.
• Believing they are on your side. They are not adversaries, but they are not allies either. They are a business selling immediacy at a price, and that price rises when their risk rises. Expecting a market maker to be present at a good price during a crash is expecting charity from a risk desk.

Where you will see this most clearly

• EUR/USD: The most competitively quoted instrument in the world: market making at its tightest.
• S&P 500: Exchange-traded with designated market makers and formal quoting obligations.
• Silver (XAG/USD): Noticeably fewer makers than gold, and the wider, jumpier quotes show it.
• Ethereum: Market making is fragmented across venues, so quality varies enormously by exchange and hour.

For different levels of experience

If you are brand new

A market maker is a firm whose job is to always be willing to trade with you. Without them, you would click buy and wait for someone to happen along who wanted to sell exactly what you wanted, exactly then. They remove that wait, and the spread is what you pay them for it.

They are not betting against you and they usually have no view on direction at all. They want to buy slightly below the middle and sell slightly above it, over and over, ending the day owning nothing. Your individual trade is of no interest to them whatsoever.

The one thing to take away is why prices get worse at certain moments. When big news is about to land, market makers do not know which way it will go either, and they know that anyone trading right then may be faster or better informed. So they widen their prices or stop quoting until the dust settles. That is the reason your spread triples at news, and it is the same for every trader at every broker.

If your results are inconsistent

The practical shift for an inconsistent trader is to stop thinking of the price as a fact and start thinking of it as a quote with conditions attached. That reframes a whole category of complaints. Bad fills are not personal; they are what happens when you demand immediacy at a moment when immediacy is expensive.

It also opens up a genuine improvement most people never make: using limit orders where the strategy allows. Paying the spread on every entry and exit is a choice, not a law. If your setups let you wait at a level rather than chase into it, you flip from paying for liquidity to being paid for providing it.

Finally, use maker behaviour as a condition filter. When the spread widens and stays widened, the people whose job is to always quote have decided the risk is too high. That is a considered assessment by professionals with far better information than you, and taking a discretionary trade into it is arguing with them for no reason.

If you are experienced

Market making reduces to managing inventory and adverse selection, and every observable behaviour follows from those two constraints. Quote skew reveals inventory pressure; spread width and quoted size reveal the maker’s current estimate of informed flow. The withdrawal of liquidity ahead of scheduled events is a rational response to a known jump in the probability of trading against information.

In FX the meaningful structural variables are the composition of your broker’s liquidity pool, last look windows and their symmetry, and rejection behaviour conditioned on short-term price movement. Those determine your effective transaction cost far more than the top-of-book quote, and they are measurable from your own fill data across a reasonable sample.

For anything latency-sensitive or size-sensitive, the working assumption should be that displayed liquidity overstates available liquidity, and that the overstatement grows precisely with volatility. Execution models built on quoted depth will systematically underestimate cost in the tail, which is where the strategy’s survival is decided. See execution models.

Risk management for this strategy

The risk market makers create for you is conditional liquidity. Their presence is voluntary and it is weakest in exactly the conditions where you most want to exit, violent moves, panic, news, holidays. Any risk plan that assumes you can always get out near your stop level is assuming a market maker will be there, and that assumption fails at the worst possible time.

Build for the bad state. Size positions so that a fill materially worse than your stop is uncomfortable rather than catastrophic, and reduce size further on thin instruments and around known events. Use the position size calculator against a realistic worst-case exit rather than an ideal one, and remember that no stop protects you across a gap, because at that moment there is no quote at all.

Where Market Structure Pro fits

The information market makers act on, how risky it is to quote right now, is invisible on a candle chart. A setup forming while liquidity providers are stepping back looks exactly like one forming into deep, competitive quoting.

Market Structure Pro is spread-aware and session-aware precisely because that state matters. Live spread conditions and the session context feed into a single verdict, so a signal appearing while makers are quoting defensively is graded for what it is rather than presented as a clean opportunity. The dedicated ranging and chop filter does the rest of the job, returning NO TRADE when price is drifting on thin, uncommitted flow.

The output is one call (TRADE, TRANSITION or NO TRADE) with a confidence percentage, an A/B/C grade and a plain-English explanation of what is supporting or limiting it, locked on the closed bar so it cannot repaint. It is decision support, not a signal service, it places no trades, and it guarantees nothing.

Frequently asked questions

What is a market maker?

A firm that continuously quotes both a buy price and a sell price in an instrument, so other participants can always trade immediately. It earns the difference between those two prices, the spread, in exchange for taking on the risk of holding positions it did not choose.

How do market makers make money?

Mainly by buying slightly below the mid price and selling slightly above it, many thousands of times a day, and managing the resulting inventory so they end up close to flat. On some exchanges they also receive rebates for providing liquidity, and retail market maker brokers additionally earn from internalising client flow.

Do market makers manipulate prices?

Legitimate market makers quote competitively because quoting away from fair value gets them arbitraged and loses them money. Manipulation such as spoofing is illegal and prosecuted on regulated exchanges. Widening spreads around news is not manipulation, it is a standard response to the risk of trading against better-informed flow.

Why do spreads widen when news is released?

Because a market maker quoting a tight two-sided price into a data release is likely to trade with someone faster or better informed and lose money on it. Widening or withdrawing quotes is how they protect themselves. It happens simultaneously across all venues and to all clients.

Is a market maker the same as a market maker broker?

No. A wholesale market maker quotes prices into the market and manages inventory risk. A retail market maker broker is a firm that takes the other side of its own clients' trades internally rather than hedging them. The names are similar and the businesses are quite different.

What is last look in forex?

A practice in parts of the foreign exchange market where the liquidity provider has a brief window to accept or reject a trade after receiving it at its quoted price. It exists because of network latency and price staleness. It is disclosed, but asymmetric use of it has attracted regulatory criticism, so rejection rates are worth checking.

Do market makers know where my stop loss is?

A wholesale market maker has no visibility of retail stop orders held at a broker. Price is often drawn to areas where stops cluster because those areas hold resting liquidity that anyone filling size has a reason to seek, not because a specific participant is targeting your individual order.

Can I be a market maker as a retail trader?

In a limited sense, yes. Every time you place a resting limit order instead of a market order, you are providing liquidity and potentially earning the spread rather than paying it. You lack the speed, capital and hedging infrastructure of a professional maker, but the trade-off between passive and aggressive orders is available to everyone.

Related reading

• The Bid-Ask Spread: The payment market makers receive, and the cost you pay on every trade.
• Who Is on the Other Side of My Trade: Where wholesale market making ends and retail broker conflict begins.
• Order Book and Market Depth: Most of the resting size in any book was placed there by a market maker.
• ECN, STP and Market Maker Brokers: How the different retail execution models actually route your order.
• What Is Liquidity: What market makers supply, and what happens when they stop supplying it.