--- title: "What is market making | RupeeCase" description: "Market making means quoting a price to buy and a price to sell in the same contract, and earning the gap between them when both sides fill." source_url: "https://www.rupeecase.com/learn/questions/what-is-market-making" --- Market making earns the spread only while the inventory and the hedge stay under control 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](https://www.sebi.gov.in/reports-and-statistics/research/aug-2026/study-profitability-of-individual-traders-in-the-equity-derivatives-segment-fy25-fy26-_103835.html) What is market making?Market making means quoting a price to buy and a price to sell in the same contract, and earning the gap between them when both sides fill. The real risk is the inventory that builds up when one side fills more often, so market makers hedge it and move their quotes as the risk changes. LGo deeper ## Where Learn teaches this. [Go deeperHFT, MFT and LFT compared10 min, Advanced](/learn/path-19/module-19-3-hft-mft-lft)[Go deeperColocation, latency and fairness: NSE's history11 min, Advanced](/learn/path-19/module-19-4-colocation-and-latency) SSources ## Go to the source. 4 sources, SEBI the most cited The publisher of each source listed below. Source: Module undefined source list. 1. [Avellaneda and Stoikov (2008), High-frequency trading in a limit order book, Quantitative Finance](https://doi.org/10.1080/14697680701381228) Paper 2. [SEBI, safer participation of retail investors in algorithmic trading (circular, 4 Feb 2025)](https://www.sebi.gov.in/legal/circulars/feb-2025/safer-participation-of-retail-investors-in-algorithmic-trading_91614.html) SEBI 3. [NSE option chain page (shows the bid and ask of each strike)](https://www.nseindia.com/option-chain) NSE 4. [SEBI investor education, Understanding derivatives](https://investor.sebi.gov.in/understanding_derivatives.html) SEBI ?Questions people ask ## Related questions. [QuestionHFT, MFT and LFT: what is the difference?Intermediate](/learn/questions/hft-vs-mft-vs-lft)[QuestionWhat are the order book, bid ask spread, impact cost and tick size?Intermediate](/learn/questions/order-book-spread-impact-cost)[QuestionWhat is slippage, and what are VWAP and TWAP?Intermediate](/learn/questions/slippage-vwap-twap)[QuestionDoes order flow or footprint chart trading work?Intermediate, trap check](/learn/questions/order-flow-trading) [All 130 questions](/learn/questions/) Explore next ## Go deeper on this question. * [QuestionWhat was the NSE colocation case, and how does HFT work in India?A short answer with a dated chart](/learn/questions/nse-colocation-case) * [ToolOption payoff builderLegs on a dated Nifty chain, breakevens and charges](/learn/tools/payoff-builder) * [GlossaryInvesting glossary, 230 termsPlain word definitions, and the app’s own](/learn/glossary) Community ## Join my WhatsApp group. Scan the code, fillFill one short form, and join my WhatsApp group. Slides, sources, factsheets and the rebalance logs live there, and members join a daily Google Meet with me. New to RupeeCase? [Getting started](/getting-started) [See the terminal](/terminal) [Sign up for RupeeCase](https://invest.rupeecase.com/signup) [Join the WhatsApp group](https://forms.gle/C6HMtM1Z2GfeocQV7) [One form, one group](https://forms.gle/C6HMtM1Z2GfeocQV7)Scan with your phone camera Education only, not investment advice, a research report or a recommendation to buy, sell or hold any security. RupeeCase (QC Alpha Technologies Pvt Ltd) is not registered with SEBI as an investment adviser or research analyst. Contracts and prices shown are for illustration only, come from NSE end of day files at least 30 days old, and are not recommendatory. Derivatives trading carries a high risk of loss.