Sales & Trading: How Markets Actually Trade

Chapter 1 introduced S&T as a seat. This chapter is about the actual mechanics — what "making a market" means, why a trading desk's job isn't mostly about predicting whether a stock goes up or down, and how liquidity itself becomes something to manage.

Making a market: the core S&T mechanic

A market maker quotes two prices simultaneously: a bid (the price they'll buy at) and an ask (the price they'll sell at). The ask is always higher than the bid — that gap, the bid-ask spread, is the market maker's compensation for standing ready to trade instantly with whoever shows up next, in either direction.

Say a stock's quote is $50.00 bid / $50.05 ask. A market maker buying at $50.00 from one client and selling at $50.05 to the next pockets the $0.05 spread — not by betting on direction, but by providing continuous liquidity and capturing the toll for it. Multiply a few cents by enormous trading volume, all day, and that's a real, non-directional business.

Order types — how a trade actually gets placed

• Market order: execute immediately at whatever the current best available price is. Guarantees execution, not price.
• Limit order: execute only at a specified price or better. Guarantees price (if it fills at all), not execution — a limit order can simply sit unfilled if the market never reaches it.

Why the bid-ask spread isn't constant

The spread widens or narrows based on real risk. A highly liquid, heavily traded stock (huge daily volume, many market participants) typically has a tight spread — lots of competition to make that market keeps it efficient. A thinly traded stock, or any stock right before a highly uncertain event (an earnings announcement, a major macro release), sees spreads widen — the market maker is compensating themselves for the extra risk of being caught holding inventory right as the price potentially jumps.

Managing inventory risk — the actual skill

When a market maker buys from a client, they now hold that position — inventory — and are exposed to the price moving against them before they can offload it. A real trading desk isn't trying to predict where the market goes; it's trying to manage the risk of the inventory that client flow forces it to hold, often by adjusting quotes (skewing the bid/ask to attract flow that reduces an unwanted position) or hedging with a related, more liquid instrument.

What a trading desk's day actually looks like

Far less "placing directional bets" than pop culture suggests, and far more: taking client orders, managing the resulting inventory and risk in real time, adjusting quotes as conditions change, and coordinating with sales on what clients are asking for. The desks that do take more directional risk (often called "prop-adjacent" flow, though true proprietary trading at banks is heavily regulated today) are a smaller slice of what most of S&T actually does day to day.

Try it yourself

The best way to build real intuition for this chapter isn't reading more about it — it's doing it. This site has an actual, playable market maker simulation below.