What does “MM” mean? What actually is a Market Maker?

What does it mean when someone says MM in online forums? What actually is a market maker?

Definition: Market Maker (MM)

A market maker or liquidity provider is a company that quotes both a buy and a sell price in a security. They hold inventory and hope to make a profit of the spread or difference between the bid and ask price. Even though the profit margins are small on spreads, they add up to a lot with several trades.

Origin

Market makers have been around since the invention of markets. Think of a market maker as a retail shop that buys and sells shares. Just like a retail store, they set prices in competition with each other. In early markets if an investor actually wanted to buy or sell a stock, they would have to physically go to a market maker. A location where they would be quoted a price to buy a stock or sell a stock. As a result, market makers determine set prices of stocks buy either having successful sales or having to adjust the price to entice a buyer or seller.

Investors today use brokerage apps to buy and sell shares. In this sense, even if you purchase shares through your broker, they are still communicating with market makers to determine the bid and ask price. Most online brokers and brokerage apps allow you to set a limit price or a market price.

A limit price is a specific price that an investor would like to buy or sell stock. Whereas a market price is purchased or sold at whatever price market makers have currently set.

There has always been the fear of market manipulation with market makers. Some tactics that they use have come into question especially with the popularity of brokerage apps to make trades. For example, a market maker may lower the sell price of a security to entice panic sellers into believing that a stock price is dropping rapidly.

At the end of the day, no investor would be able to buy or sell shares if market makers did not exist. They are a necessary part of the market and integral to stocks going up or down in value.

Examples

”My profits are burning up. MMs have used their political and media influence to harm the retail investor.”

“Hedge funds and market makers are timing their sells to CNBC.”

“Market makers seem to be driving the price down in after hours trading!”

An image with the words hashtag market maker
A Market Maker or “MM” sets bid and ask prices for shares of a stock.

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