3. What Is a Market Maker?
A merchant of immediacy: always willing to buy, always willing to sell, and paid the spread for never saying no.
A market maker (MM) simultaneously posts a bid and an ask in the same instrument, hoping to buy at the bid, sell at the ask, and capture the spread — over and over. The MM doesn't try to predict where the price is going; it tries to be the counterparty to everyone else's impatience.
Watch Rosa's business below as a simulation: a mid-price that drifts randomly, quotes around it, traders arriving at random and hitting either side.
The two P&L streams
The figure splits the MM's profit into the two streams every desk monitors separately:
- Spread P&L — the accumulated half-spreads from every fill. Steady, almost mechanical income. This is the business.
- Inventory P&L — the mark-to-market change of whatever you happen to be holding. Pure noise at best, a slow bleed at worst. This is the risk.
A good market making operation maximizes the first stream while strangling the variance of the second. Notice in the simulation that inventory drifts away from zero on its own — random fills don't balance perfectly. Left unmanaged, the position grows like a drunkard's walk, and with it your exposure. Chapter 6 derives exactly how much you should shade your quotes to push inventory back toward zero.
The economics of one round trip
It pays to write the business down as an accountant would. One round trip — buy at the bid, later sell at the ask — earns the spread, minus everything that happened in between:
Each negative term gets its own chapter: fees are venue terrain (Part III), the adverse move splits into inventory risk and adverse selection (Chapter 5), and the time you spend holding — which scales the adverse-move term — is exactly what the mathematics of Chapter 6 minimizes. Two further subtleties hide in the word "round trip":
- Round trips require both sides to fill. In a balanced, mean-reverting market they do, constantly. In a trending market only one side fills — there is no round trip, just a growing position. The trend doesn't reduce your income; it converts your business from spread-collection into an unintended directional bet.
- The halves of the trip are not independent. The fill that opens your position is more likely to arrive precisely when the price is about to move against you (Chapter 5 makes this rigorous). Averaging "spread per round trip" over good days hides the bad fills that never closed.
Why someone pays you the spread
Takers cross the spread because immediacy is worth more to them than the spread costs: a hedger needs the position now, a retail trader doesn't care about 1¢, an arbitrageur is locking a larger profit elsewhere. As long as a healthy share of the flow trades for reasons other than superior information, the kiosk business works. The moment most of your counterparties know something you don't, you are no longer a kiosk — you are the sucker at the table. That's Chapter 5.
2. The Trader's Toolkit: Candles, Timeframes & Indicators
Every trading platform speaks the same visual language: candlesticks, moving averages, volume, timeframes. A market maker must be bilingual — fluent in the chart, and fluent in the order flow hiding underneath it.
4. A Brief History of Market Making
From men in colored jackets shouting in pits, to algorithms quoting in microseconds, to community-owned vaults quoting on-chain. Click each event to expand it.