Translation: Market Maker = Market Maker.

Simplified definition: It is a licensed financial institution (usually an investment bank or financial brokerage firm) that commits to being continuously ready to buy and sell a particular stock or financial asset at pre-announced prices during trading hours. In short, this entity operates as a "wholesaler" in the financial market; if you want to sell your shares but cannot find a buyer, the market maker will buy them from you, and if you want to buy but cannot find a seller, it will sell shares from its inventory to you. In other words, it is the "liquidity provider" that ensures continuous buying and selling activity without interruption, earning its profit from the small difference between the buying and selling prices (Bid-Ask Spread).

How does it work?: A market maker displays continuous prices for a stock on trading screens, placing a buy order at a certain price (for example, SAR 50.00) and a sell order at a slightly higher price (for example, SAR 50.10). When an ordinary investor decides to sell at the market price, the system immediately matches the order with the market maker's buy order. This small difference (10 halalas in this example) represents the profit margin the market maker earns in return for providing liquidity and bearing the risk of holding the stock in its portfolio for a short period.

Example (a stock in the parallel market and broker intervention): Imagine that you own 10,000 shares in a medium-sized company listed on the "Nomu" market or any market that sometimes suffers from low liquidity. You suddenly need "cash" and decide to sell your shares. Under normal circumstances (without a market maker), you might have to offer your shares at a very low price to attract buyers or wait for days until your order is fully executed, which could cause the stock price displayed on the screen to collapse because of the large supply. However, if a "market maker" (such as Riyad Capital or SNB Capital) is contracted by the company, it will immediately step in and buy the quantity from you at the prices it continuously quotes. It does not buy the shares to invest in them forever; rather, it places them in its inventory and reoffers them for sale to other investors. The result? You obtain immediate liquidity "at the press of a button," and the stock maintains its price stability without severe volatility.

What does this mean for you as an investor in the financial market?

  • Immediate liquidity and ease of exit (investor protection): The presence of a market maker reassures you as an investor that you can liquidate your investments whenever you wish. This removes the "discount premium" typically imposed on illiquid assets (as you may have read about in the marketability discount), thereby strengthening investors' confidence in the stock.
  • Price stability and limiting severe volatility: It reminds you that there is a "shock absorber" in the market. During panic and indiscriminate selling, the market maker is obligated to buy certain quantities to ease the decline, while during excessive optimism, it offers shares for sale to moderate an unjustified rocket-like rise.
  • Hidden trading cost (the spread): It shows you that there is an indirect cost you pay when trading quickly: the difference between the bid and ask prices (Spread). The more active the stock is and the more market makers compete for it, the narrower this spread becomes (meaning a lower cost for you). The more inactive the stock is, the wider the spread becomes to compensate the market maker for the risks of stagnation.

Frequently asked question: If the market maker controls both buying and selling, does that mean it manipulates stock prices or benefits from investors' losses?

Answer: No, absolutely not. A market maker operates under very strict regulations imposed by the Capital Market Authority (such as the CMA in Saudi Arabia or the SEC in the United States). Its goal is not to speculate or bet on the stock's direction (up or down), but rather to earn small, consistent profits from "price spreads" by executing millions of transactions. In fact, a market maker bears significant risk because it is legally required to provide bids and offers even on days when the market collapses and everyone else flees, which may cause it to buy shares whose value temporarily declines simply to fulfill its regulatory obligations to provide liquidity.