The primary role of a market maker is to provide liquidity to a market to ensure people can easily enter and exit their positions.

At a high level, the way a market maker does this is by buying a contract, then soon after selling that contract to someone else at a slightly higher price. The difference between the price they ask to purchase the contract at (the bid) and the price they intend to sell it at (the ask) is called the spread.

Market makers make money by collecting the spread - generally, they don’t have an opinion as to whether the price of a contract should go up or down. Market participants are okay with paying a slight premium to the market maker because they benefit from being able to enter and exit trades more easily. If a trader would like a better price than what the current bid-ask is, they can use the limit order to make a resting bid or ask to get a good price and avoid paying exchange fees.

The way this is mechanically done on Kalsh is by utilizing limit orders on the order book and using Kalshi’s API. By placing limit orders, market makers can place open orders to buy and sell contracts at prices they find attractive. Then, when someone wants to transact at the price, the trade takes place and those open orders are taken off the order book.

Market makers do best when volatility is low - if major events cause the price of a contract to change dramatically before the market maker is able to offload the contracts they purchased, they could be stuck holding contracts that are far below the price they paid. For that reason, the market maker needs to keep track of where the market is going at all times - they need to be able to cancel resting orders, and/or offload contracts they own at a moment's notice so they can update where their bid-ask range falls. Market makers will also often hedge their position in the extreme case a market moves beyond what their current positions will profitably allow.

Some other resources to check out:

• Using the Order Book
• Utilizing Limit Orders