Basic Points

• Market makers could be considered the keepers of the market, guaranteeing that orders will be filled near fair value on trades if other traders are not there to take the other side of the order. 
• They do not try and push the market around or manipulated prices. Without market makers, we would not be able to have fair and orderly markets. 
• The mechanical trading behavior of market makers as they fill orders allow us to predict flows that affect the direction or range of price movements. 

Intermediate: A Closer Look at Market Making

Market makers stay in business by collecting profits from the difference of the bid/ask spread and expertly managing their risk by hedging hostile order flow. While they will use some profits to take on controlled risks, in general market makers aim for neutrality as much as possible across all of the types of risk. The main types of risk they need to manage are directional (delta related), implied volatility (vega related), and pin/assignment risk (gamma related). 

The misconception that market makers are market manipulators is refuted by the simple fact that their primary task and objective is to hedge hostile order flow. Their mandate is to provide for a fair and orderly market, and they are awarded special privileges such as being able to buy and sell options on stocks at the same time, and to wield an almost unlimited amount of leverage. 

Some market makers can act as dealers, by taking some market exposure as they provide liquidity. These dealers try to hedge out as much of an option’s Greek exposures as possible (reduce or remove any directional risk) and their hedging may become a significant portion of daily trade volume in a stock, which may affect a stock’s direction and price.