I've looked everywhere but still can't figure out how they make money. If they are required to provide liquidity by always being there to either buy or sell a stock, how are they not losing money on an obvious 'pump and dump' stock where the price jumps by 400% in one day, only to then come crashing back down the next day. If they are required to buy stocks when everyone is selling and the stock has no chance of ever coming back up to the 400% price it was when it was being 'pumped' how are market makers not losing money?
i think they also get some amount per share they trade....also they get huge margin or leverage. still a lot of of them got wiped out in the 1987 crash...but that is just the risk of doing busisnes
I know what the spread is but it still doesn't make sense. If there is a stock which is crashing hard then how are they not losing money. It seems all of you also have no idea how it works - you keep spewing out the same nonsense about the spread but don't actually understand the spread has nothing to do with it. If they are being forced to provide a bid on a stock that is tanking then that bid will be hammered until the price has lost all of it's gains. So the market maker is left with huge inventory of a worthless stock they have had to buy at a higher cost (as they are required to always provide a bid).
in the case you describe then yes the market maker would be losing money on that specific instrument. but usually things bounce a little up and down or sit still. ie. eurodollars barely move so a MM can buy at 96.25 and sell at 96.5 all day or week. also MM are not restricted to one instrument the quote many
What 2rosy said, and they’ll widen spreads if they’re losing money. OP. Please read this book and quit insulting ET members for not explaining an encyclopedia to you:
A designated market maker is require to provide a two sided market but doesn’t have to be at the top of the book either.