Market makers role

Question

I'm trying to understand the role of a market maker, so the best bid and offer depends on where orders are resting, and these orders are from retail investors or institutions or whoever, why is it said you buy from the market maker when you issue a market order, are you not just buying shares from the guy who had the best offer?

I understand this would make the stock very illiquid seeing as most market participants are likely to only place orders in areas of structure like swing highs and lows and the spread would be all over the place, so do market makers themselves place orders on the bid and ask to keep the stock liquid?

If market makers hold inventory in a stock, is this done as soon as the company floats? Do you sell all your outstanding shares to a market makers who then sell it on?

Answer 1

The role of the market maker is to make sure there is a bid and ask on a particular stock. That's it. The market maker ensures that there is a price at which you can buy and a price at which you can sell immediately, but these are not necessarily the best prices. The majority of trades do not involve market makers and occur between two third parties.

Whoever said a market order trades with the market maker is thinking of the way stock markets were years ago, not the way they are now. Market orders are supposed to execute immediately and at one time trading with the market makers was the method for executing immediately. If you issue a market order today, it executes with the best available limit order(s) on the other wide of the trade. This may or may not involve a party that identifies as a market maker.