Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsEasy
Which of the following statements BEST describes the primary role of a market maker in the secondary market?
- ATo regulate the activities of broker-dealers.
- BTo facilitate the orderly trading of securities by providing liquidity.
- CTo underwrite new issues of securities for corporations.
- DTo provide investment advice to retail clients.
Show answer & explanationAnswer & explanation
Correct answer: B. To facilitate the orderly trading of securities by providing liquidity.
Market makers stand ready to buy and sell securities at publicly quoted prices, thereby providing liquidity to the market. This ensures that investors can always find a counterparty for their trades, facilitating orderly transactions.
Why the other options are wrong
- A. This is the role of regulatory bodies like FINRA or the SEC.
- C. This is the role of an underwriter in the primary market.
- D. This is typically the role of a financial advisor or registered representative.
Market Maker
A broker-dealer that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price, providing liquidity to the market.
- Quotes both bid (buy) and ask (sell) prices.
- Earns profit from the spread between bid and ask.
- Essential for orderly trading in the secondary market.
Memory trick: Market Makers 'Make' the market 'Move' smoothly.