A financial institution (like a bank or a brokerage firm), or even an individual (a broker or trader), that always stands ready and prepared to quote both a bid price (a price at which it is prepared to buy) and an offer price (a price at which it is prepared to sell), usually for the most widely traded instruments. In so doing, this makes a two-sided market in a given instrument where market makers must generally be ready to purchase and sell at least 100 shares of a stock they make a market in. Accordingly, a large order from an investor may have to be filled by more than one market-maker at potentially different prices.

Being a market maker has its own risks, especially when a market maker buys a specific company’s shares and then the shares begin to fall before a prospect buyer has bought them. To tackle this risk, the market maker may buy the shares for a given price (the ask price), say $200, and then offer to sell them at a higher price (the bid price), say $200.1. The ask-bid spread will allow the market maker to pocket a sufficient portion of price change (by trading a large number of shares, daily) to offset that risk.

In a different context, a market maker is a trader on the floor of an exchange who holds special trading privileges in exchange for being obligingly prepared to help maintain a fair and orderly market.