What is a market maker?

A broker-dealer firm that provides continuous liquidity by buying and selling securities from their own inventory.

True or False: Market makers act as agents for customers.

False. Market makers act as principals, trading from their own inventory, not as agents for customers.

The difference between bid and ask prices is called the _____.

Bid-ask spread

Which price do investors pay when buying from a market maker?
A) Bid price
B) Ask price
C) Spread price
D) NBBO price

B) Ask price

What does NBBO stand for?

National Best Bid and Offer

Why do market makers widen spreads during volatile markets?

To compensate for increased inventory risk and potential losses from holding securities during price fluctuations.

A stock has bid $25.00 and ask $25.05. What is the spread?

$0.05

True or False: Market makers must maintain quotes during all trading hours.

True. Market makers have continuous quotation obligations during regular trading hours.

What is the inside market?

The best bid and best offer available across all market makers and exchanges (NBBO).

Which securities typically have narrow spreads?
A) Small-cap stocks
B) Large-cap stocks
C) Illiquid bonds
D) Penny stocks

B) Large-cap stocks

Market makers buy at the _____ price and sell at the _____ price.

Bid, ask

What is backing away?

Refusing to honor a firm quote, which is a serious regulatory violation.

True or False: The bid-ask spread represents pure profit for market makers.

False. The spread is gross revenue; market makers also face costs and risks.

When do market makers typically quote narrow spreads?

When securities have high trading volume, low volatility, and multiple competing market makers.

What regulatory body oversees market maker registration?
A) SEC only
B) FINRA
C) CFTC
D) FDIC

B) FINRA

A market maker has excess long inventory. How might they adjust quotes?

Lower the ask price to attract buyers and reduce their long position.

What is a firm quote?

A quote that market makers must honor for at least the minimum quantity specified.

True or False: Market makers can withdraw quotes anytime without notice.

False. Market makers need regulatory approval or justifiable reasons to withdraw quotes.

The minimum quote size is typically _____ shares.

100

What happens when a bid price equals an ask price?
A) Normal market
B) Locked market
C) Crossed market
D) Inside market

B) Locked market

Why do market makers face higher capital requirements than regular broker-dealers?

Because they assume inventory risk by holding positions in securities that may fluctuate.

What is front running?

Illegally trading ahead of customer orders using knowledge of those pending orders.

True or False: Market makers charge separate commissions to customers.

False. Market makers typically profit from the spread, not separate commissions.

During a trading halt, market makers must _____.

Immediately cease trading and withdraw quotes

What determines the NBBO?
A) Single largest market maker
B) Exchange officials
C) Best prices across all venues
D) Average of all quotes

C) Best prices across all venues

A crossed market occurs when _____.

A bid price exceeds an ask price

What is the primary source of market maker revenue?

The bid-ask spread earned on each round-trip transaction.

True or False: Customer orders receive priority over market maker proprietary trades at the same price.

True. Customers have priority over market maker trades at identical prices.

Market makers must report trades within _____ seconds.

10

What type of risk do market makers face when holding inventory?
A) Credit risk
B) Price risk
C) Operational risk
D) Liquidity risk

B) Price risk

Quote stuffing involves _____.

Rapidly entering and canceling quotes to create confusion or slow competitors.

What must market makers maintain between departments to prevent information misuse?

Information barriers (Chinese walls) between market making and other departments.

True or False: Market makers can selectively show better prices to preferred customers.

False. Market makers must provide fair access to quotes for all participants.

Electronic Blue Sheets are used for _____.

Providing detailed transaction data to regulators for investigations.

What percentage of trading day must market makers typically maintain quotes?

90% or more of the trading day.