Market making earns the spread only while the inventory and the hedge stay under control

Market making earns the spread only while the inventory and the hedge stay under controlDiagram with 6 boxes. Post a bid and an offer in the same contract to Get filled on one side, which creates inventory; Get filled on one side, which creates inventory to Move both quotes to lean against the inventory; Move both quotes to lean against the inventory to Hedge the net exposure in a related contract; Hedge the net exposure in a related contract to Widen the spread when volatility or news rises; Widen the spread when volatility or news rises to Charge fees and the cost of the hedge, then read the net.Post a bid and an offer inthe same contractGet filled on one side, whichcreates inventoryMove both quotes to leanagainst the inventoryHedge the net exposure in arelated contractWiden the spread whenvolatility or news risesCharge fees and the cost ofthe hedge, then read the net
The loop a market maker runs on every quote, from the bid and offer to the net result. A map of method, not a result. Source: RupeeCase method map; Avellaneda and Stoikov (2008). As of 16 Oct 2026.

A market maker stands ready to trade. It posts a bid to buy and an offer to sell in the same contract, and the spread between them is the revenue when both are filled. On an exchange order book this quoting happens in the open, and the spread is visible on screen before any trade.

The spread is not profit by itself. A fill on one side leaves an inventory that moves with the price, so the market maker is long or short until it hedges or offsets the position. Quotes move with the inventory. A long position pushes both prices down, so the next fill is more likely on the sell side.

Liquidity on NSE's order book comes from traders who post resting limit orders, including firms that quote both sides, and a retail order trades against those resting quotes. For a retail trader the spread is a cost on every trade, and it is wider on thin strikes and in fast markets. Knowing who stands on the other side makes that cost easier to see.

The flow below shows the loop. Each step is a place where a quote can go wrong: a fill that is too large, a hedge that comes late, or a spread too narrow for a sudden move. The loop is the same in slow and fast markets, while the speed and the size of the risk change.

A market maker's edge is small per trade and large in count, and it depends on adjusting quotes faster than the market moves. A small trader is rarely placed to copy that, and the spread it pays is the price of meeting it.

Before you trade. Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. Read the SEBI study