Uniform Securities Agent State Law (Series 63) Practice Exam

What role does a market maker play in the securities market?

1. They only broker transactions

2. They create liquidity by buying and selling securities

3. They regulate trading practices

4. They operate only in the primary market

The correct answer is: They create liquidity by buying and selling securities

A market maker serves a crucial function in the securities market by providing liquidity, which is essential for the smooth functioning of financial markets. They accomplish this by actively buying and selling securities, enabling other investors to quickly enter or exit positions without causing significant price fluctuations. When market makers facilitate trades, they hold an inventory of securities and are prepared to buy or sell them at publicly quoted prices. By doing this, they help narrow the bid-ask spread, making it easier for other market participants to trade. This role is particularly important in markets where certain securities may not have a high volume of trading activity, as it ensures that there is always a counterparty available for buying or selling. In contrast, the other roles mentioned in the options do not accurately describe the primary function of market makers. For example, brokering transactions alone does not equate to creating liquidity, as brokers typically facilitate trades between buyers and sellers rather than making a market themselves. Additionally, market makers are not responsible for regulating trading practices; that task falls to regulatory bodies and exchanges. Finally, market makers operate in both the primary and secondary markets, not exclusively in the primary market, where new securities are issued. This comprehensive understanding highlights why the assertion that market makers create liquidity through their buying