For the financial markets to be fully efficient, it is important that there be maximum liquidity of the products traded there. Thus, when a buyer wants to open or close a position, it is essential to be able to find a counterparty for his or her transaction at all times.
It is the role of the market maker to provide this liquidity. Indeed, any new market must designate a group of banks or brokers who are responsible for maintaining the liquidity of securities at all times. Market makers publish continuous buying and selling price ranges for all the products offered. They therefore ensure the possibility for any buyer or seller to find a counterparty on the market.
In exchange for playing this critical role, market makers are granted privileged access to the market and, most of the time, their transactions are free. Another privilege of being is market maker is that you can take advantage of the market “spread” – the difference between the bid and the offer price – to make money: A market maker, whether buying or selling, is always certain to be on the most advantageous side of a trade – selling on the most expensive side of the spread, and buying on the cheapest side.
Being a market maker is not without risk, however. The obligation to give continuous prices for all products sometimes forces market makers to take positions that they do not want to have in their portfolio. Thus, it is common for the market maker to accept to trade on an extremely illiquid product and find himself stuck with positions that are very difficult to return to the market.