What does a market maker do in financial markets?

A market maker plays a crucial role in financial markets by quoting both buy and sell prices for securities, which helps facilitate trading and liquidity. By consistently providing these quotes, market makers ensure that traders have a way to enter and exit positions in a timely manner. This activity tends to narrow the bid-ask spread, making transactions more efficient and enabling smoother price discovery for the assets being traded.

The function of a market maker is particularly important in less liquid markets, where the lack of available buyers or sellers could lead to significant price fluctuations. By stepping in to provide quotes, market makers help stabilize prices and enhance market efficiency. They do this with their own capital, committing to buy and sell at specified prices regardless of supply and demand conditions, which also helps mitigate the potential for exploitative pricing.

In contrast, providing financial advice, offering insurance on transactions, and conducting market research do not encapsulate the primary responsibilities of a market maker. These activities are typically associated with financial advisors, insurance firms, and analysts, respectively, and do not involve the direct facilitation of trading within the markets as market makers do.