How do market makers typically profit, besides commissions?

How do market makers typically profit, besides commissions?

• A. They profit by buying and selling stocks and earning commissions, but risk losses if the market declines.
• B. They make all profit from commissions only and have no risk.
• C. They profit from selling information.
• D. They profit only from underwriting new issues.

Answer: (A)

Market makers earn mainly from the bid-ask spread—the difference between the price they’re willing to buy at and the price they’re willing to sell at. By continuously quoting both sides, they make a small profit on each trade they facilitate, and sometimes receive liquidity rebates from exchanges for providing that liquidity. This earnings stream is separate from any commissions paid to brokers. Because they hold inventory to quote prices, they also face price risk if the market moves against them, which is managed through hedging and careful inventory control. They don’t profit primarily from selling information or from underwriting new issues.

Market makers earn mainly from the bid-ask spread—the difference between the price they’re willing to buy at and the price they’re willing to sell at. By continuously quoting both sides, they make a small profit on each trade they facilitate, and sometimes receive liquidity rebates from exchanges for providing that liquidity. This earnings stream is separate from any commissions paid to brokers. Because they hold inventory to quote prices, they also face price risk if the market moves against them, which is managed through hedging and careful inventory control. They don’t profit primarily from selling information or from underwriting new issues.