A market maker provides offers to buy and sell a security or other financial product throughout the day. While a market maker will tailor the liquidity they provide to the market, he or she is willing to transact with any market participant, offering an essential service to institutional investors, banks, brokers and retail investors.
Generally speaking, market makers do not seek to establish directional positions in the market. Instead, market makers are willing to buy or sell an asset, striving to make a profit by collecting some fraction of the difference between its offers to buy and to sell.
Market makers compete for transactions based on certain characteristics of their order, such as price, time of placement and order size. This competition narrows the difference between the price to buy and the price to sell, decreases costs, and dampens volatility, which reduces risk and facilitates the flow of capital in the market.