What does market-making involve?

What does market-making involve?

• A. Creating long-term investment strategies
• B. Providing liquidity by quoting buy and sell prices
• C. Buying and holding securities indefinitely
• D. Exclusively serving institutional investors

Answer: (B)

Market-making plays a crucial role in the financial markets by ensuring that there is enough liquidity for various securities. The essence of market-making involves quoting both buy and sell prices for a particular asset, thereby facilitating trading. By doing so, market makers help to narrow the bid-ask spread, allowing other market participants to buy and sell with ease. This function is vital because it allows investors to execute trades quickly without causing significant impacts on the security’s price. Market makers typically hold a certain inventory of the securities they are making a market in, but their primary role is about providing the prices at which others can trade, not necessarily about long-term investment strategies or holding securities indefinitely. The other choices relate to different aspects of financial operations but do not capture the core activity of market-making, which is about maintaining liquidity and enabling trading through active price quotes.

Market-making plays a crucial role in the financial markets by ensuring that there is enough liquidity for various securities. The essence of market-making involves quoting both buy and sell prices for a particular asset, thereby facilitating trading. By doing so, market makers help to narrow the bid-ask spread, allowing other market participants to buy and sell with ease.

This function is vital because it allows investors to execute trades quickly without causing significant impacts on the security’s price. Market makers typically hold a certain inventory of the securities they are making a market in, but their primary role is about providing the prices at which others can trade, not necessarily about long-term investment strategies or holding securities indefinitely.

The other choices relate to different aspects of financial operations but do not capture the core activity of market-making, which is about maintaining liquidity and enabling trading through active price quotes.