Markets · Episode 03 · Reading companion
How does a market maker make money?
The spread is only the beginning. Inventory and adverse selection complete the picture.
INSIDE THE MECHANISMFIG. 01
01QUOTEBid and ask
02INVENTORYExposure
03REPRICENew information
Two prices, two commitments
A market maker quotes a bid to buy and an ask to sell. If both trades happen at those prices, the difference is gross trading revenue. It is not guaranteed profit: the trades may occur at different times, and one may never happen.
The unfinished trade
After buying, the market maker holds inventory whose value can move. A better-informed seller may trade just before the price falls. That adverse selection can overwhelm the spread, even before fees and other costs.
Sources & scope
A concise reading companion to this Market Mechanics topic. This page covers the mechanism; it does not make a performance or investment recommendation.
SEC Investor.gov · Market makersArticle history
18 September 2026 — First web reading companion.