The market makers profit in any market, whether up or down. The market makers understand human psychology very well, and use it to set bid and ask prices. The bigger the news, the more they make. So yeah, today there were profit takers. Dubai was a great excuse. The market makers absolutely depend on the herd behavior of millions of small investors just trying to do their best.
This primer on market makers explains their role as both buyer and seller AT THE SAME MOMENT. When you put in an order at market price, you are agreeing to pay or receive whatever the market maker says right now. A limit order means you determine the price, but not the time of execution. A stop loss order is downright dangerous; there is substantial risk they will be executed at prices far below your stop price. Market makers have been known to drop the price just long enough to buy stock at a stop loss price, and turn around and sell at a much higher price, especially on overnight orders. On the West Coast, you can wake up to see your stock charging ahead---without you.
Market makers operate with different rules than us little guys.
For one thing they are allowed (with caveats) naked shorts. Sorceress Sarah explains how market makers protect themselves by selling short.
As TocqueDeville explains, even if a market maker gets into trouble, the government comes to the rescue.
Madoff's big problem is he got caught. How many other market makers haven't been caught?
More about market makers in this diary by wilderness voice.
And this one by manumoka.
This piece by Darksyde explains how market makers work the spread. Again the bigger the news, positive or negative, the bigger excuse they have to make a bigger spread, and the more they pocket.
And my own average little investor write-up of my research. I do not mean to imply that the market makers do it all by themselves. They have to take into account lots of variables including genuine market sentiment. I interviewed lots of people, financial advisors, traders, etc. I asked each of them to explain market makers. I probed based on their answers. One thing I learned in the process of interviewing 50-odd professionals is that even though they might "know" more than me, none of them knew enough to actually advise me. The answer to every problem is to buy whatever their company sells whether it actually meets the client's needs or not. Their money is made on transactions, not results. Some are into annuities, some insurance, some bonds, some ETFs, some ...
Lots of people have lost money on their 401(k). Where did everyone's 401(k)'s go? To the market makers. Ironically, some of these people are having to report capital gain. No matter how much their 401(k) lost, if the value of the account was greater than its basis (how much put in) when the account was dumped, there is capital gain.