Why Do Market Makers Primarily Use Limit Orders Rather than Market Orders?
Market makers profit from the bid-ask spread by simultaneously placing limit buy (bid) and limit sell (ask) orders. By using limit orders, they provide liquidity and are often eligible for 'maker' rebates, which reduces their trading costs.
Crucially, limit orders ensure they control the price at which they execute, protecting them from the immediate negative slippage and price impact that a market order would incur, which is vital for their low-margin business model.
Glossar
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Limit Orders
Execution ⎊ Limit orders, within cryptocurrency, options, and derivatives markets, represent instructions to buy or sell an asset at a specified price, or better, contingent upon market conditions.