Market Makers: What UK Investors Need to Know
A plain English guide to market makers, bid-offer spreads, liquidity, quoted prices, and what they mean for private investors in UK shares.
Market makers are the firms standing between many buyers and sellers. They help trades happen, but they also shape the price you actually get.
The Short Version
- Market makers quote a buy price and a sell price for shares they cover.
- The gap between those two prices is the bid-offer spread.
- A wider spread usually means higher trading cost and weaker liquidity.
- These firms take risk because prices can move while they hold stock.
- Private investors should check spreads, order type and deal size before trading.
What market makers actually do
Market makers are professional trading firms that stand ready to buy and sell certain shares. Their role is to keep a usable price available when investors want to trade.
They do this by quoting two prices. The bid is the price at which they may buy from you. The offer is the price at which they may sell to you.
The difference is the spread. If a share is quoted at 98p to 102p, you may sell near 98p and buy near 102p. The visible price can hide that cost.
The London Stock Exchange market making page explains the formal role for member firms. The basic idea is simple: make prices and deal when required.
Why the spread matters
Market makers earn money partly through the spread. That does not mean every trade is unfair. It means the cost is built into the dealing price rather than shown as a separate fee.
For large and liquid shares, the spread may be tiny. For small companies, stressed markets or quiet trading days, it can be much wider.
A wide spread matters because you start behind. If you buy at 102p and could immediately sell at 98p, the share must move before you break even.
Our guide to who really moves share prices explains how private investors, institutions and professional dealers all sit in the same market. The spread is where their interests meet.
How prices move around orders
Market makers adjust prices when orders arrive, news changes, or risk builds up. If more people want to buy than sell, they may lift the price. If sellers dominate, they may cut it.
They are not guessing for fun. They are managing inventory. If a firm buys too much stock from sellers, it may lower its bid or widen the spread to reduce risk.
This is why a small share can move sharply on modest volume. One order can matter if there is little stock available and few buyers waiting.
These firms can also step away from tight prices when uncertainty rises. That is often when private investors notice the market feels harder to trade.
How order books changed the picture
Not every UK share trades in the same way. Larger shares often trade through electronic order books, where buyers and sellers place orders directly into the system.
The old picture of one dealer in the middle is too simple for many large shares. Still, dealers remain important in less liquid areas and around quoted prices.
The London Stock Exchange SETS page describes its flagship electronic order book. It is built for the most liquid shares and exchange traded products.
For private investors, the practical lesson is the same. Do not assume the last traded price is the price you will get. Check the live quote before you commit.
When market makers can help or hurt
Market makers can help because they provide liquidity. Liquidity means the ability to buy or sell without moving the price too much.
Without them, some smaller shares might trade even less often. You could wait longer for a buyer or seller, and the price could gap more severely.
They can hurt when the spread is wide, the quote is thin, or the deal size is large for that share. The cost then becomes real, even if no one calls it a charge.
They are not there to protect you from a bad trade. Their job is to quote and manage risk. Your job is to decide whether the quote is acceptable.
A Worked Example
Imagine a small company is quoted at 48p to 52p. The mid-price shown on a website may be 50p, but you cannot usually deal at 50p.
If you buy 2,000 shares at 52p, your cost is GBP 1,040 before commission or platform charges. If you immediately sold at 48p, you would receive GBP 960 before charges.
That GBP 80 gap is the spread doing its work. It is not a visible invoice, but it is a real trading cost.
Now imagine bad news lands and sellers rush in. Market makers may lower their bid to 44p and offer at 50p. The spread widens because risk has risen.
What private investors should check
Check the spread before you trade. A cheap-looking share can be expensive to enter and exit if the spread is wide.
Use limit orders where your platform allows them. A limit order sets the worst price you are prepared to accept. It does not guarantee execution, but it gives you control.
Also check whether your platform gives a firm electronic quote or only an indicative price. An indicative price can change before execution, especially in thinly traded shares.
If the quoted spread looks unusually wide, waiting can be sensible. The market may be reacting to news, low volume or a lack of available stock.
Think about deal size. A small order in a liquid FTSE 100 share is different from a large order in a quiet AIM share.
Our guide to how institutions execute large orders shows why professional traders split size carefully. Private investors can learn from that caution.
What This Means For You
These firms are not villains and they are not friends. They are part of the trading machinery. They help create a market, then charge for risk through the spread.
The lesson is to look past the headline price. Before you trade, check the live buy and sell quote, the spread, the order type and the size you are trying to deal.
This matters most in smaller companies. Our guide to tree shakes and small-cap prices explains why short price moves can feel more dramatic than the underlying news.
Market makers cannot tell you whether a share is worth owning. They can tell you what the market is prepared to quote right now.
In Plain English
Market makers quote prices so investors can buy and sell. They usually quote a lower buying price and a higher selling price.
The gap is the spread. It is one of the most important costs in trading, especially for smaller and less liquid shares.
A tight spread suggests easier trading. A wide spread tells you to slow down and check whether the deal still makes sense.
This post is adapted from The Street Smart Trader. Used with permission.
This article is for general financial education only. It is not financial advice or personal investment advice. Investments can fall as well as rise, and you may get back less than you invest.