How Market Makers Work

Every executed order needs someone on the other side. In heavily traded assets, there are always enough buyers and sellers. In assets with less activity, or during quiet hours, that's not always true: without a counterparty, the order sits unfilled or gets executed at a much worse price. The market maker exists to solve exactly that problem.

In this guide we explain what it does, how it makes money, what risk it takes on, and what that changes for traders, using real numbers from BOVA11, B3's Ibovespa ETF, from April to October 2026 (Yahoo Finance data).

What a market maker is

A market maker is an institution, such as a bank, a brokerage, or a specialized firm, that commits to continuously keeping both buy and sell offers for an asset at the same time. On the Brazilian exchange, the activity is regulated by the CVM and B3 and formalized through a contract with the asset's issuer or with the exchange itself, with rules on maximum spread, minimum quantity, and time present in the order book.

• Bid: the price at which it agrees to buy.
• Ask: the price at which it agrees to sell, always a bit higher.
• Spread: the difference between the two. It's the payment for the service of always being available.

The market maker isn't betting on a direction. It wants to buy from whoever is selling and sell to whoever is buying, nearly at the same time, pocketing the spread.

How to calculate the market maker's gain and risk

The gain math is simple: spread × quantity traded on both sides. The risk math is the one few people do: until it manages to sell what it bought, the market maker is left holding inventory exposed to price swings.

• Gain per full cycle (buy and sell): spread × quantity.
• Inventory risk: quantity held × price move.
• Cycles needed to cover a loss: inventory loss ÷ gain per cycle.

Practical example: spread and inventory on BOVA11

On October 6, 2026, BOVA11 closed at R$ 202.50, with 7.77 million units traded. From April to October, the average was 3.68 million units per day, about R$ 656 million. The weakest day had 1.30 million units; the strongest, 15.31 million.

Now an illustrative situation (the spread and lot size are hypothetical; the price and the drop are real). A market maker offers to buy at R$ 202.48 and sell at R$ 202.52: a spread of R$ 0.04, or 0.02% of the price.

• Buying and selling 100,000 units: 0.04 × 100,000 = R$ 4,000 per full cycle.
• On August 11, 2026, BOVA11 fell from R$ 169.27 to R$ 165.05, a drop of 2.49%, the largest of the period.
• With 100,000 units in inventory that day: (169.27 − 165.05) × 100,000 = R$ 422,000 in losses.
• Cycles to recover: 422,000 ÷ 4,000 ≈ 105.

That's why the market maker isn't a guaranteed money machine. The business depends on turning over inventory quickly, adjusting quotes as the price moves, and hedging, often with futures or with the basket of stocks that makes up the ETF. On highly volatile days, it tends to widen the spread to offset the higher risk, and the exchange's rules set how far that can go.

Liquid assets and less-traded assets

In heavily traded stocks, such as Apple, which averaged 49.3 million shares traded per day over the same period, competition among buyers, sellers, and several liquidity providers already keeps the spread tight. It's in less-traded assets, like many ETFs, options, and shares of smaller companies, that the market maker makes the biggest difference.

How to use this information when trading

Look at the spread before entering

The spread is a cost of entering and exiting. In assets with an active market maker, it tends to be smaller and more stable. In assets without one, it can widen a lot, especially at the open and close of the session.

Favor limit orders in less liquid assets

A market order accepts whatever price is available. If the offers are spaced far apart, it can get filled well away from the last price. A limit order sets the worst acceptable price.

Understand the order book

The market maker's offers appear in the book just like any other. Seeing the same quantities repeatedly at the best bid and ask is a common sign of its presence, not, by itself, an indication of price direction.

Limitations

The market maker narrows the spread, but doesn't eliminate price risk or guarantee a counterparty for any quantity. In extreme moments, the rules allow wider spreads or trading halts. And this article's example is illustrative: spread and offer size vary from asset to asset and from contract to contract.

Common misconceptions about market makers

• Thinking the market maker trades against the small investor: its business model is the spread, not the direction of the price.
• Ignoring the spread as a cost, especially on short-term trades.
• Using a market order on a thinly traded asset and getting filled far from the expected price.
• Reading the market maker's standing offers in the book as a buy or sell signal.
• Assuming today's liquidity guarantees tomorrow's: BOVA11's volume ranged from 1.30 million to 15.31 million units a day within the same half-year.

To see this in practice, use a demo account and compare, at different times, the spread of a heavily traded asset with that of a thinly traded one. Log the values for a few days: you'll see how much of your cost comes just from the difference between the bid and the ask.

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