Market Making
Definition
The practice of continuously providing buy and sell quotes for a security, earning the bid-ask spread as compensation for providing liquidity.
Explanation
Market makers are the backbone of market liquidity. They commit to always quoting both a bid (willing to buy) and ask (willing to sell) price, ensuring any investor can trade at any time. In return, they earn the bid-ask spread. Major electronic market makers (Citadel Securities, Virtu Financial) handle over 40% of US equity volume. The risk: adverse selection — being 'picked off' by informed traders who know the stock is about to move. Market makers manage this risk through speed, algorithms, and diversification across thousands of securities.
How Stoquity Uses This
Stoquity incorporates market making analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.