Market Makers (Liquidity Providers) and the Bid-Ask Spread Explained in One Minute

Market makers tend to oftentimes be surrounded by a bit of an aura of mysticism in light of the fact that other market participants consider them all-knowing entities who can do no wrong.

Is that the case?

Most definitely not. Instead, why not look at market makers as liquidity providers so as to see them for what they actually are: yet another market participant, with pros as well as cons associated with their status.

In approximately one minute, this video explains what market makers are, why the liquidity they provide tends to be quite useful and what the (in)famous bid-ask spread is all about.

If you are new to trading/investing, all of this terminology might seem confusing but in true One Minute Economics fashion, I've explained these concepts in a way that leaves little room for interpretation.

After watching this video, you will understand why market makers are important actors in the ecosystem (yes, for primarily liquidity-related reasons), why knowing a thing or two about the bid-ask spread is recommended and... well, why you should care :)

[OneMinuteEconomics]

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[YoungNino]

This is the best explanation possible... do you realize how many people make videos that are 7-15 minutes long and they don't simply explain that the SPREAD is paid to the market maker!??? Without knowing that every trade seems like a ripoff..SO many videos explaining this just gloss over the fact that you buy at a higher price, but then sell at a lower price and ignore that SOMEONE has to be the beneficiary of that price difference since you ONLY get the bid price when you sell, but are forced to pay the ask price when you buy.

[OneMinuteEconomics]

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[adityamishra]

Wouldn't that market maker face a loss of $100? How does he make money off of it? Is it by receiving comissions from both for helping them buy and sell their stocks?

[gurusaiprasannakumar]

Hey! You are doing a great job! Can you upload something about bond yields and interest rate relationships? Also, Can you upload series of what does a central bank does and how is the money circulated in an economy! So that the entire series is watchable and gives an idea about the entire topic. That'd be very much insightful. Thank you once again.

[dend]

I think it works like this: Brokers have 2 days to acquire the stock after a buy order is placed. Jim wants to buy 1 stock xyz for $100. Order is processed. Within the next two days the market maker can post sell orders of xyz for $90 to lower the perceived price. Bill comes along 1 day later and sees xyz is selling for $90 and decides to sell his xyz stock at $89 to remain competitive. The broker then buys Bill's xyz stock for $89 using Jim's $100 and pockets the extra $11 for themselves.

Algorithms are created to judge when it's profitable to artificially move the markets in this manner

Please let me know if I'm wrong here

[michaelmckee]

So say if the buyer paid £850 for a stock that the seller initially wanted to sell for £950, how would the market maker make money? (if the market maker were the broker).. Good video btw!

[JaiC]

This is great, thank you so much for taking the time to make this.

Very silly question - a buyer can buy at the 'ask' price - if you wanted to 'sell' naked call/put - you can do that anywhere in between? and second - when larger orders are filled at the 'bid/mid' - can one infer that those are 'sell' orders?

Thank you!! =)

[finnportier]

If the bid is 900 and the ask is 902 then wouldnt the market maker be losing 2$ buying the ask price and selling to the bid price?

[randomshit]

What's the difference between a market marker and a trader?

[jnyfah]

So how does the market maker settle the problem between Bill and Sarah??

[BoxerDogs]

At what price might the MM buy at, from the person who wants to sell?

At what price might the MM sell at, to the person who wants to buy?

[thegreatkoorosh]

Bill and Sara have other options! WHAT OPTIONS???

[timmachoo]

Hello sir, it's good knowledge from you, but I have a doubt, will market maker square off his short selling in a day itself like retailers

[reogoncalves]

for this to make sense u need to swap the values of bid and ask price. in the video it was shown that bid price is lower than ask which is wrong as bid price is always higher than ask price!

[seniorcomputerdude]

Sorry, but wdf? "Market maker steps in..." like they are unicorns. Was here to learn something, got puzzled even more... :(

[jepoiy]

Bill wants to sell $950 sarah wants to buy it $850 market maker steps in provides liquidity to make the trade happens? So market makers endup losing $100?!? I don’t get it

[Rab]

RuneScape Analogy: You are a rich player who always maintains a Buy Order for 2B Bones at 100GP and a Sell Order for 2B bones at 102GP.