Someone has to be willing to trade when you want to, and market makers are that someone.
Quoting both sides
Standing ready to buy and to sell continuously.
Which is what makes a market liquid.
How they earn
The spread between their buying and selling prices.
Which compensates for the risk of holding inventory.
Obligations
Formal market making agreements requiring continuous quotes.
Which exist on some exchanges.
Widening spreads
Quotes pulled back in volatile conditions.
Which is when liquidity is most wanted and least available.
Why liquidity matters more than people notice
Being able to sell an asset quickly at a price close to the last traded one is a service, and it is provided by someone taking the other side.
Which is not free, and the spread is what it costs.
In calm markets this is invisible; in stressed ones spreads widen sharply and the cost of that service becomes very visible.
Inventory risk
Holding positions between trades.
Which is the risk the spread compensates.
Electronic market making
Automated systems quoting continuously.
Which has narrowed spreads substantially over recent decades.
Payment for order flow
Brokers routing retail orders to market makers for payment.
Which regulators in several jurisdictions have examined and some have banned.
What this means for investors
Trading in liquid instruments during normal hours costs least.
Designated and voluntary roles
Some exchanges appoint firms with formal obligations to quote continuously in specified instruments.
Which supports liquidity in smaller companies that would otherwise trade rarely.
Elsewhere market making is voluntary and firms withdraw when conditions become unattractive, which is when investors most notice their absence.
Adverse selection
Trading against better-informed participants.
Which is the risk built into the spread.
Spreads as a market quality measure
Narrow spreads indicating competitive market making.
Which regulators monitor.
Fragmentation
Liquidity spread across multiple venues.
Which complicates execution.
What investors can control
When and how they trade rather than the market structure.
The trade-off in one sentence
Market makers make it possible to trade whenever you want, and the spread is what that convenience costs.
Which is a reasonable arrangement that becomes expensive in instruments nobody wants to trade.
The practical implication is to check the spread before buying anything unfamiliar, because it is a real cost paid twice and it is rarely displayed prominently.
Spread as a screening tool
Wide spreads indicating thin trading.
Which matters more than most retail platforms suggest.
Exchange traded products
Authorised participants maintaining prices near underlying value.
Which is an analogous mechanism.
Stressed conditions
Liquidity provision reducing when volatility rises.
Which is documented across several market events.
A general note
Market structure differs between exchanges and jurisdictions.
Why market structure is worth understanding
Most investment writing is about what to buy. Very little of it is about how the machinery underneath actually works: how orders are matched, how funds track what they claim to track, how prices respond to information, and what regulation does and does not cover.
That machinery determines a large part of the outcome. It sets what trading costs, it explains price movements that otherwise look irrational, and it defines the boundary between a risk you accepted and a failure someone else is responsible for.
None of it tells you what to invest in. It tells you what is happening when you do, which is a different and more durable kind of knowledge than any particular recommendation.
Where the reliable information is
Exchanges publish their rulebooks. Index providers publish their methodologies. Fund managers publish factsheets and annual reports. Regulators publish investor education material and firm registers. Companies publish annual reports and prospectuses.
All of it is free, all of it is authoritative, and almost none of it is promoted, because nobody makes money from you reading it. It is consistently more useful than commentary about it.
A general note
This article describes how markets and financial products work and is not investment, tax or financial advice. Rules, protections, tax treatment and market structure differ substantially between countries and change over time. Anything with money attached warrants checking against the rules applying where you are, and where a decision is significant, advice from a qualified professional who knows your circumstances is the appropriate route.
The recurring lesson
Across almost every topic here, the same pattern appears: a mechanism that looks arbitrary from outside turns out to follow published rules, and the rules are available to anyone who wants to read them.
The gap between what is knowable and what most investors know is not caused by secrecy. It is caused by the material being dry, unpromoted and available only to people who go looking for it, while a great deal of louder content competes for the same attention with considerably less substance.
Nobody needs to become an expert in market microstructure. Knowing that the answers exist, and roughly where, is enough to avoid the specific mistakes that come from assuming there is no answer.