Market makers add liquidity to markets by placing limit orders and waiting for them to be filled by other traders.
Bids (i.e., buy offers) and asks (i.e., sell offers) in an order bookA list that is used by exchanges to show the outstanding buy and sell orders for a financial instrument. Order... are limit orders set by traders who wait for the market to take their trades at the set prices. These traders are known as makers, as they make, or add, liquidity to an order book by placing orders that sit and await execution.
In contrast, other traders come in and take those bids and asks, thereby removing liquidity. These traders are known as takersTakers remove a market's liquidity by filling or taking existing bids (buy offers) and asks (sell offers) from the market.....
Both makers and takers are needed for a market to work. However, makers are typically incentivized with better trading fees compared to takers.