There's a strange corner of trading Twitter where every bad trade is blamed on "the market makers." Got stopped out by 2 ticks? The market makers hunted your stop. Stock reversed the moment you bought in? Market makers see your orders. Lost money for three months straight? Market manipulation.
Some of this is paranoia. Some of it, honestly, isn't entirely wrong. Market makers do have informational advantages that retail traders lack. But the wildest conspiracy theories tend to come from people who don't actually understand what market makers do or how they make money.
So let's fix that.
What is a market maker?
A market maker is a firm or individual that continuously quotes both a buy price (bid) and a sell price (ask) for a financial instrument. They commit to buying from you when you want to sell and selling to you when you want to buy.
That's it. They're the middle person.
When you place a market order to buy 100 shares of AAPL, you're probably not buying from another retail trader who happened to place a sell order at that exact moment. You're buying from a market maker who is always sitting there with an offer. Without them, you'd have to wait until another human decided to sell at a price you liked. That could take seconds, minutes, or on less liquid stocks, much longer.
Market makers exist because someone has to be willing to trade when you want to trade.
How they make money
The business model is deceptively simple: buy at the bid, sell at the ask, pocket the difference.
Say AAPL has a bid of $189.98 and an ask of $190.00. The market maker buys shares at $189.98 from sellers and sells shares at $190.00 to buyers. That's $0.02 per share.
$0.02 sounds like nothing. But multiply it by millions of shares per day across thousands of symbols, and those pennies add up fast. Citadel Securities, the largest market maker in US equities, reportedly handles about 25% of all US stock trading volume. At that scale, $0.02 per share is a lot of money.
The catch is that market makers take on inventory risk. If they buy 50,000 shares of AAPL at $189.98 and the stock drops to $185 before they can sell them, they just lost $250,000. The spread income needs to cover these directional losses. Most market makers use sophisticated hedging to minimize this risk, but it never fully goes away.
The real revenue breakdown
Market makers make money from three sources:
- The bid-ask spread (the obvious one).
- Rebates from exchanges. Exchanges pay market makers a small rebate (~$0.002/share) for providing liquidity, because the exchange needs someone to fill orders.
- Payment for order flow (PFOF). Brokers like Robinhood route retail orders to market makers like Citadel, Virtu, and others. The market maker pays the broker for the right to fill those orders. This is where the "if the product is free, you are the product" argument comes from.
Types of market makers
Not all market makers are the same. The differences matter.
Designated market makers (DMMs)
On the NYSE, certain firms are assigned as DMMs for specific stocks. They have an obligation to maintain orderly markets in those stocks, including providing liquidity during volatile periods when others might pull their quotes. In exchange, they get certain informational advantages (they can see the order book in ways others can't).
Today there are only a handful of DMM firms. GTS and Citadel Securities handle most NYSE-listed stocks.
Electronic market makers
Most modern market making is done by electronic firms that use algorithms to quote and hedge automatically across many exchanges. Citadel Securities, Virtu Financial, Jane Street, and Two Sigma are among the largest. They operate on microsecond timeframes, adjusting quotes thousands of times per second.
Wholesale market makers (retail flow)
When you buy stock on Robinhood, your order doesn't go to the NYSE. It goes to a wholesale market maker (usually Citadel or Virtu) who fills it internally. The wholesale market maker pays Robinhood for the order flow and makes money from the spread.
The SEC requires that wholesale market makers provide "price improvement" over the best available exchange price. In practice, this means you might get filled at $190.005 instead of $190.01. Whether that price improvement is meaningful (it's half a cent) is debatable.
The "stop hunting" question
I'll be honest: this one's complicated.
Do market makers literally see your specific stop loss order at $185 and drive the price down to $185.01 to trigger it? In the way most retail traders imagine it (a person in a dark room targeting YOUR order), no.
But there's a more nuanced version that has some truth to it. Market makers can see the aggregate order flow. They know that major support levels, round numbers, and common stop-loss zones have clusters of stop orders. When price approaches these zones, the market maker doesn't need to see YOUR stop specifically. They can see that there are a lot of stops in the general area.
When those stops trigger, they generate market orders (stop losses become market orders when triggered). Those market orders create selling pressure, which pushes price lower, which triggers more stops. The market maker, who has to fill all these orders, can profit from the cascade.
Is this "stop hunting"? Sort of. It's more accurate to say that liquidity pools attract price. And stops clustered at obvious levels are a liquidity pool.
What this means for you
Stop placing your stops at obvious levels. The low of the day, a round number like $100, or directly below a well-known support level is where everyone else's stops are too. Place yours slightly wider, using ATR-based stops or structural levels that aren't as visually obvious.
Payment for order flow: should you worry?
After the 2021 GameStop saga, PFOF became a hot topic. The basic concern: if Robinhood sells your orders to Citadel, and Citadel trades against your orders, aren't your interests misaligned?
Here's the balanced take:
The argument that PFOF hurts you: Wholesale market makers select which orders to fill. They're more likely to fill orders where the customer is statistically likely to be wrong (uninformed flow) and less likely to fill orders with strong directional conviction. Some studies suggest retail traders on PFOF platforms get slightly worse execution than they would on a direct exchange.
The argument that PFOF doesn't matter much: On a typical 100-share order of AAPL, the execution difference between PFOF and direct routing is about $0.005 per share, or $0.50 total. For most retail traders, this is noise compared to the value of commission-free trading.
My take: if you're trading 100 shares of AAPL, PFOF doesn't meaningfully affect your results. If you're trading 10,000 shares of a mid-cap stock or scalping for small moves, the execution quality difference starts to matter. At that point, consider a broker with direct market access like Interactive Brokers.
What market makers can't do
It's worth putting some of the conspiracy theories to rest:
Market makers cannot hold your stock hostage. They fill your order per SEC regulations and best execution requirements.
Market makers cannot see your limit orders on other platforms. If your limit order is at Fidelity and the market maker is at Citadel, they don't see it unless it's routed to them.
Market makers cannot move an entire stock's price to target one retail trader. They're providing liquidity across millions of orders. Your 50 shares of Tesla are not on anyone's radar specifically.
Market makers can and do sometimes manipulate prices through spoofing, layering, and other illegal techniques. Virtu Financial and other firms have paid fines for these practices. But this is different from the "they're personally targeting my stop loss" narrative.
How this knowledge actually helps your trading
Knowing how market makers work gives you a few practical edges:
Trade liquid instruments. When a market maker is quoting tight spreads (AAPL: $0.01 spread), your transaction costs are minimal. When spreads are wide ($0.10+ on small-cap stocks), you're paying the market maker a tax on every trade. Stick to stocks with high volume and tight spreads, especially when day trading.
Use limit orders. Market orders guarantee execution but not price. The market maker fills you at whatever price is on the book. Limit orders guarantee price but not execution. For entries that aren't time-critical, limit orders protect you from adverse fills.
Watch the spread during news events. When major news drops, market makers often widen their spreads dramatically (sometimes 10-50x normal). This is their protection against getting caught on the wrong side of a fast move. If you trade during these moments, you're paying through the nose on spread costs. Wait for spreads to normalize.
Don't put stops at obvious levels. If you can see the support level, so can everyone else, and so can the market maker's algorithms. Use ATR-based stops or add a buffer below the obvious level.
Practice reading market structure
Open ChartMini TradeGame and practice identifying where stop clusters likely are. Look at the area just below major support levels and round numbers. Notice how price often dips below these levels before reversing, a pattern consistent with stop-driven liquidity. Training your eye for these "liquidity grabs" changes how you place entries and stops.
Common questions
Do market makers trade against me? Technically, yes. When you buy, the market maker sells to you (they're the counter-party). But they're not taking a directional bet against you. They're trying to remain neutral and profit from the spread. Their goal is to earn the $0.02 spread, not to bet that AAPL goes down.
Are market makers the same as high-frequency traders? There's significant overlap. Most modern market makers use high-frequency trading technology. But not all HFT firms are market makers. Some HFT strategies are directional (they bet on price movement), while market making is specifically about providing two-sided quotes.
Can I become a market maker? Technically, anyone quoting two-sided markets is making a market. In practice, becoming a registered market maker requires SEC/FINRA approval, significant capital, and technology infrastructure. Some prop firms have market-making desks.
Why do spreads widen during volatility? Risk. When a stock is moving fast, the market maker faces higher inventory risk. If they sell at $190 and the stock jumps to $195 a second later, they've lost $5 per share. Wider spreads compensate for this increased risk.