What is a Market Maker Spread?
A market maker spread is the difference between the bid and ask prices offered by a market maker.
How Does a Market Maker Spread Work?
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 Does a Market Maker Spread Matter?
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.