Who provides liquidity
A market maker continuously quotes a price to buy (the bid) and a price to sell (the ask) in the same instrument. When other traders hit those quotes, the market maker earns the spread between them. In return it takes on inventory risk: after buying, it holds shares that may fall in value before it can sell them. Some exchanges give designated market makers duties, such as quoting close to the best price, in exchange for fee benefits.
High-frequency trading (HFT) is a style, not a single strategy. HFT firms use very fast systems to send huge numbers of orders, hold positions for seconds or less, earn a tiny profit per trade and usually end the day flat. Many are market makers; others do arbitrage between venues or between an ETF and its components.
Most of the volume that moves prices comes from institutions: pension and mutual funds with large, long-horizon orders that are sliced into small pieces over hours or days, hedge funds with shorter views, and retail investors with small orders that usually reach a wholesaler through their broker.
- Market maker: quotes both sides, earns the spread, carries inventory risk.
- HFT firm: very fast, many orders, tiny profit per trade, usually flat overnight.
- Institution: large orders, long horizon, slices orders over time.
- Adverse selection: the risk of trading against someone who knows more.
Lab · what's graded
- Market participants25 pts
- Who holds the inventory?10 pts
- Typical HFT traits15 pts
- Spread income20 pts
- A market maker's cycle15 pts
- Adverse selection15 pts