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From what I understand, a market maker buys at bid price and sells at ask price, whereas the price taker involved with the market maker buys at ask price and sells at bid price. Basically, the market maker pockets the bid-ask spread.

In this case, shouldn't buyers and sellers try to meet half-way, irrespective of volume or other measures of liquidity? Doing so would ensure that they pay the minimum amount, right? Of course, that would be a problem for the market maker who wouldn't be making any money anymore, but from the point of view of the price takers, why do they not strive to meet half-way?

Alternatively, why is the de facto business model of market makers to pocket precisely the bid-ask spread instead of, say, a flat fee?

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Yes, a price taker buys at ask price and sells at bid price and if the market maker is on the other side of the trades, he pockets the bid-ask spread. Note that trades means a trade at the bid and a trade at the ask.

A market maker's posted quotes are not some fixed in stone price that you are forced to accept if you want to buy or sell a security. Any market participant can place a limit order offering a higher bid or a lower ask price than the market maker's quote. Doing so temporarily makes you the market maker (on the side of your order) until you get a trade fill or someone offers an even better price. If a counterparty is willing to transact at your price, your trade is executed and the market maker has nothing to do with the trade.

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  • Okay, that makes a lot of sense, but then, if I get this correctly, you either a) use a limit order (filled with a delay) to act as the market maker yourself and trade directly with another taker or b) instantly transact with the market maker at the quoted price?
    – David Cian
    Feb 9 at 16:05
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    That is correct except maybe the comment filled with a delay. If a taker meets your maker price, you transact. However, if you place a limit order, there is no guarantee that you will get a fill because price may move away from you (someone offer a better price, replacing you as the maker). Feb 9 at 16:10

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