What role do market makers play in the trading process?

• A. They match buyers with sellers, facilitating trades and earning commissions.
• B. They set all prices for stocks.
• C. They execute only at the end of the day.
• D. They only operate in electronic markets, not traditional exchanges.

Answer: (A)

Providing liquidity through continuous two-sided quotes is what market makers do. They stand ready to buy and sell a security at stated bid and ask prices, which helps traders execute trades immediately even when a counterparty isn’t readily available. By maintaining these quotes, they effectively match buyers with sellers and keep markets moving. They earn profit from the spread between the prices they’re willing to buy at and sell at, which compensates for the risk of holding inventory and the capital tied up. Prices emerge from supply and demand across the market rather than being set by a single entity. They don’t only execute at end of day, and they operate in both traditional exchanges and electronic markets.