Key Highlights

A Market maker buys and sells assets for smooth transactions, high liquidity and low volatility.
They tend to buy at a lower price and sell at a higher price. The difference is called spreads, and these are their source of income.
SEBI is the governing body. It sets the rules on who can be a market maker and what functions it must perform.

A market maker is a firm or trader that continuously buys and sells a particular stock or asset. Their main job is to provide liquidity and make sure that investors can trade easily without large price changes.

For example, Ravi wants to sell 100 shares of XYZ Ltd. at ₹500. Meera wants to buy 50 shares at the same price. Without direct communication, both would wait. That is why a market maker is needed. He quotes:

Purchase: ₹498/share
Selling Price: ₹502/share

Trader	Action	Quantity	Price (₹)	Profit/Loss
Ravi	Sell	100	498	Since the normal selling price was ₹500, Loss = ₹200
Meera	Buy	50	502	Since the normal cost price was ₹500, Loss = ₹100
Market Maker	Holds stock	50	Avg 500	Since the normal cost price was ₹500, Profit = ₹300 + 50 shares

The numbers show how both Ravi and Meera trade instantly. From this trade, the market maker earns ₹300 + 50 shares, which he can sell for an even higher price.

Because of the market maker, the transactions were instant, and Ravi and Meena got what they wanted. Let’s discuss more about the roles of a market maker and more in this blog.

How Does a Market Maker Function?

There are shops which give you gold at one price and buy it back at another. Stock market makers work similarly. They are always ready to buy or sell shares. This keeps the market in a dynamic mode. If they were not involved with buying and selling, trading could slow down, or prices could increase significantly. Here, we will discuss how markets function.

Continuous Two-Way Quotes

A market maker always posts two prices: bid (buying price) and ask (selling price). These quotes run all day, so traders never get confused without a buyer or seller.

For example, Riya wants to sell 100 shares of XYZ at ₹200 each, but no buyer exists. A market maker buys instantly and keeps liquidity in the market. The table summarises both events.

Trade	Quantity	Price (₹)	Action
Riya sells to Market Maker	100	200	Liquidity provided
Market Maker sells later	100	202	Profit earned (₹200)

A market maker ensures buying/selling happens instantly, even when no direct counterparty is present. ‘Kuch rahe ya na rahe, Liquidity rehni chahiye!’

Holding Inventory

To make trades fast, market makers keep some stock with themselves. If someone wants to buy immediately, they sell from their own stock. If someone sells, they add it to their inventory.
For example, stock ABC’s value increases from ₹500 to ₹520 suddenly. Market maker sells at ₹518, reducing demand and preventing a sharper price hike. But what would happen if the market maker were not there?. Let’s find in the table given below.

Time	Price Without MM (₹)	Price With MM (₹)
10:00	500	500
10:05	520	518
10:10	540	522

A market maker acts like a “shock absorber,” just like your belly fat. They reduce the extreme ups and downs in stock prices.

Earning the Spread

Their main earning comes from the spread. The spread refers to the difference between the buying and selling prices. Even if the margin is small, doing thousands of trades daily makes it profitable.

For example, a market maker buys DEF shares at ₹150 (bid) and sells at ₹152 (ask). If he trades 1,000 shares, the profit is ₹2,000.

Action	Quantity	Bid/Ask (₹)	Total (₹)
Buy (Bid)	1000	150	1,50,000
Sell (Ask)	1000	152	1,52,000
Profit	–	–	2,000

They make the income and also smooth out the trade by buying and selling as and when required.

Obligations

Market makers aren’t free to quit whenever they want. They work by certain rules that ask them to provide quotes continuously, even in volatile times. This reduces panic and keeps prices stable.

For example, the NSE requires market makers on its Emerge-SME platform to provide two-way quotes for at least 75% of the trading day. The minimum quote depth was set to ₹100,000. This rule prevented panic in volatile markets.

Designated vs. Competitive Market Makers

Some exchanges assign only one market maker per stock (like the NYSE). These are known as Designated Market Makers (DMMs). Other exchanges (like Nasdaq) allow many market makers to compete, leading to the formation of Competitive Market Makers (CMM). Here, they usually get fewer spreads.

For example, in stock ABC Ltd, a DMM ensures fair prices by quoting ₹100 (buy) and ₹102 (sell), while the 2 CMMs give different quotes and with less spreads as compared to the DMM.

Let’s look at the table given below to know the difference.

Type of Market Maker	Buy Quote (₹)	Sell Quote (₹)	Spread (₹)	Special Role
Designated Market Maker (DMM)	100	102	2	Solely responsible for stability, continuous presence
Competitive Market Maker (CMM) 1	100.5	101.8	1.3	Competes for the best price
Competitive Market Maker (CMM) 2	100.6	101.9	1.3	Adds liquidity by tighter pricing

DMM guarantees stability even in low-volume trades, while CMMs improve efficiency by competing on price. Both are important for their respective tasks. Together, they balance reliability and competitiveness in markets.

What are the Roles of a Market Maker?

Till now, we have seen the roles of market makers in providing liquidity, the smooth working of a market and a few more. This table summarises the roles of market makers that we have not discussed yet:

Role	Description
Provide Liquidity	Market makers always offer buy and sell prices, so investors can trade any time, even if others aren’t active.
Narrow Bid–Ask Spreads	By contesting prices, they reduce the gap between buying and selling prices, lowering costs for all traders.
Facilitate Trade Execution	They immediately fill market orders, letting traders buy or sell without waiting for counterparties.
Stabilise Prices	In volatile markets, they absorb shocks by trading, helping keep prices smooth instead of jumping wildly.
Support Price Discovery	By adjusting quotes based on supply and demand, they help markets find the correct price.
Manage Inventory & Risk	They balance their holdings to avoid large losses, often with hedging or adjusting quotes.

Without market makers, trading can be costly and slow. It will be a task to find an accurate price and execute quickly. All the scenes tasks that smooth out the entire system are looked after by market makers.

Regulatory Aspects: SEBI and Global Rules

Market makers help keep markets active, but their role comes with rules. In India, these rules are set by SEBI and stock exchanges. Let’s discuss each one of them in this section.

Aspect	Details	Why It Matters
Initial SEBI Guidelines (1993)	Market makers must be: approved by SEBI, operate on major stock exchanges, quote on at least 5 scrips, and hold 30,000 shares per scrip. They must provide continuous two-way quotes.	This encourages liquidity and reduces price spreads in less-active stocks.
SME Segment Market Making	Merchant bankers must ensure market-making for 3 years on SME exchanges. Violations result in warnings, application holds, and possible debarring.	Make sure that new SME listings have buyers and sellers.
Corporate Bond Market Makers (Proposed)	SEBI proposes that only those stock brokers/merchant bankers with an additional net worth of ₹10,00,00,000 and above can work as market makers.	Aims to develop liquidity and efficiency in India's corporate bond market.
NSE Rules for Market Makers	Market makers must: quote 75% of the trading day, maintain a minimum depth of ₹1 lakh, guarantee execution, and serve for 3 years.	Liquidity and stability are maintained in SME and thinly-traded stocks by mandating consistent price quotes.

The agenda for each rule is the smooth movement of the market. Market makers are bound to work in a way that increases liquidity, stabilises the prices, helps traders with transactions, etc. It makes the trading efficient and fair.

Conclusion

The most important factors that keep any financial markets running are liquidity, reduced volatility and smoother transactions and trading for investors. Market makers are the ones that perform these functions. For investors, brokers, and institutions, they make the markets more efficient and accessible. Like everyone, they are bound by the SEBI-led rules because, as said earlier, ‘Market chalti rehni chahiye!’

Frequently Asked Questions

Can retail investors become market makers?
Generally no. Market making requires large capital, licenses, and advanced infrastructure.

Are market makers present in crypto markets?
Yes. Crypto exchanges often appoint market makers to ensure liquidity in digital asset trading.

Can market makers manipulate prices?
Although regulated, market makers can influence short-term prices by adjusting spreads or inventory, but strict SEBI rules prevent unfair manipulation.

What technology do market makers use?
They rely on advanced trading algorithms and high-frequency systems to update quotes within microseconds and manage risks.

Do market makers operate in commodity markets, too?
Yes, they exist in commodities like gold, oil, and agri-products, ensuring liquidity in futures and options trading.

Are market makers always profitable?
No. During extreme volatility, spreads may not cover losses from sudden inventory value drops, leading to risks.

How does market making benefit retail investors?
It ensures small investors can buy or sell instantly at fair prices without waiting for counterparties.