Markets · 6 pages · 12 min

How market makers earn the spread

Market makers buy at their bid and sell at their ask, and the gap between them is the gross earning.

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From the opening

A market maker posts a bid and an ask, buys from people who hit the bid, and sells to people who lift the ask. The spread between those prices is the gross earning on a round trip that flattens the inventory, the pay for standing ready when others want to trade now. The opening covers buy the bid and sell the ask, a round trip captures the gap, and inventory can give it back.

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Inside

Buy the bid and sell the ask
A round trip captures the gap
Inventory can give it back
Adverse selection is part of the width
Where the idea stops applying
A distinction worth keeping

Sources

Market-maker bid-ask revenue
Inventory risk and adverse selection

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How market makers earn the spread

From the opening

Inside

Sources

Also on the desk