What Is a Market Maker and a Market Taker?
A market maker is a trader or financial institution that provides liquidity to the markets by placing buy and sell orders in an asset. Market makers are typically large banks, brokerages, or other financial institutions that have access to large amounts of capital and can afford to take on risk. They provide liquidity by buying when there are few buyers and selling when there are few sellers. This helps keep prices stable and allows investors to trade quickly without having to wait for someone else willing to buy or sell at their desired price.
A market taker is an investor who buys or sells assets from a market maker at the current prevailing price. Market takers do not add any additional liquidity but instead rely on the existing supply-demand balance set by the market makers’ orders. By taking advantage of these prices, they can often get better deals than if they had tried trading with another individual investor directly as it eliminates some of the negotiation process involved in finding a suitable counterparty for each transaction.