What a market is

Strip away the screens and the jargon and a market is just a place where people who want to buy meet people who want to sell, and a price gets discovered in the process. Everything else — exchanges, order books, high-frequency trading — is machinery built on top of that one idea.

The two-sided problem

Imagine selling your used car. You don’t actually know what it’s worth, and you don’t know who wants it. You could wait for the perfect buyer who values it exactly as you do — but they might not show up for months. Or you could drop your price until someone bites — fast, but you leave money on the table.

That tension — price vs. immediacy — is the heartbeat of every market. Sellers want a high price and a fast sale, but usually can’t have both. Buyers want a low price and to buy now. The market is the mechanism that resolves this, and it does so by splitting participants into two roles.

Makers vs. takers

This is the single most important distinction in market microstructure.

• A maker (liquidity provider) posts a standing offer and waits: “I’ll sell 100 shares at £50, to whoever wants them.” They provide the option to trade to everyone else. They get a price they like, but they pay in patience and risk — they don’t know when (or if) someone takes them up, and the world may move against them while they wait.
• A taker (liquidity demander) shows up wanting to trade right now and accepts a price someone has already posted. They pay for immediacy — done instantly, but they cross the spread to do it.

        MAKERS                         TAKERS
  (provide liquidity)            (consume liquidity)
  post resting orders   ──────▶  hit existing orders
        │                              │
        │  paid in patience            │  pays for
        │  + bears risk                │  immediacy
        ▼                              ▼
  ┌───────────────────────────────────────────┐
  │              ORDER  BOOK                    │
  │      price discovery happens here           │
  └───────────────────────────────────────────┘

The key mental shift: liquidity is a service one side provides and the other consumes. The maker is selling immediacy; the taker is buying it. When we reach firms like Jane Street and Citadel Securities in M5, this is literally their business — industrial-scale makers, earning the spread for providing immediacy at enormous volume.

A subtlety: maker and taker are roles in a given trade, not types of people. The same trader can post a resting order (maker) on one trade and aggressively hit someone’s offer (taker) on the next. The role is the action, not the actor.

Price discovery

No central authority decrees what a stock is worth. The price emerges from the collision of buy and sell intentions. Every maker posting an offer casts a tiny vote about value; every taker who lifts that offer confirms or rejects it. The transaction price is the running output of that continuous negotiation.

When news breaks — a company misses earnings — no referee resets the price. Makers yank old offers and repost lower; takers who believe the news sell aggressively; the price slides until buyers and sellers rebalance at the new level. The price discovered the new reality through behaviour.

Two consequences that matter later:

• Prices carry information. A move often reflects someone knowing or believing something — which is why makers are nervous about who trades against them. That fear is adverse selection, the heart of M1.
• A market needs both sides present. If makers vanish, price discovery seizes up — that is exactly what a liquidity crisis or flash crash is.

Source: Larry Harris, Trading and Exchanges, ch.1–2. Harris frames trading as a search problem for counterparties — his taxonomy of why people trade is the bit worth reading early.