Market making is the activity carried out by a market maker: continuously quoting a price at which it will buy a security and a higher price at which it will sell, and standing ready to trade at both. The main entry describes the firms that do this, their obligations and their place in different markets. This entry notes how the term is used for the activity and the trading strategy.
The income from market making is the bid-ask spread, earned when a buyer and a seller trade against the quotes in turn, plus any rebates an exchange pays for resting orders. The risks are two. Prices may move while the firm holds a position, which is managed by adjusting quotes to keep market maker inventory small. And the counterparty may be better informed, a problem known as adverse selection.
In electronic markets the activity is automated and is one of the main strategies of high-frequency trading firms, which quote thousands of instruments and update prices many times a second. Market making may be done under a formal agreement with an exchange, with duties on quote size and spread, or voluntarily by any firm acting as a liquidity provider.