Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Market Maker Spread

What it is:

A market maker spread is the difference between the bid and ask prices offered by a market maker.

How it works (Example):

The market maker spread is calculated by subtracting a market maker's ask price (price at which he/she is willing to sell a security) from the bid price (price at which he/she is willing to purchase a security). The resulting number is the profit that the market maker earns for each order processed.

For example, suppose a market maker offers to sell shares of stock ABC for $52 per share and offers to purchase shares at $48 per share. The market maker spread would be $52 - $48 = $4.

Why it Matters:

The size of a market maker spread is inversely correlated with the volume of trades conducted by the related market maker. In other words, a market maker that offers a small spread processes a high number of orders, and vice versa. Highly liquid markets tend to have very small spreads. Market maker spreads are regulated to prevent market price distortions.