The Liquidity Function
When you click 'buy' on a stock at the market price, someone needs to be willing to sell to you immediately. In most cases for retail orders, that someone is a market maker. Market makers maintain continuous bid and ask quotes, ensuring that investors can transact when they want to — they provide what regulators call 'liquidity.' Without market makers, buyers and sellers would need to find each other directly, making trading slower and more costly.
How Market Makers Profit
Market makers profit from the bid-ask spread — the difference between their buy price (bid) and sell price (ask). When a retail investor buys at the ask and another sells at the bid, the market maker has provided liquidity to both and earned the spread on the round trip. Market makers also manage risk by hedging their positions and using sophisticated algorithms to adjust their quotes continuously.
The Market Maker Obligation
As a condition of operating as a designated market maker on exchanges like the NYSE, market makers accept obligations to maintain continuous quotes and not abandon the market during volatility. These obligations are enforced by exchange rules and FINRA requirements. In return, market makers receive certain trading privileges. The 2010 Flash Crash raised questions about whether market maker obligations adequately prevent liquidity withdrawal during crises.
Citadel's Scale as a Market Maker
Citadel Securities is among the largest market makers in the United States. It is the largest designated market maker on the NYSE and a dominant wholesale market maker for retail equity orders. This scale means that the firm's decisions about how to price, execute, and handle orders have a direct impact on the experience of millions of retail investors.