Market Maker

B is correct. As a market maker, DEF Securities is obligated to buy the shares from Roberto at its quoted bid price of $18.40, immediately providing liquidity by purchasing into its own inventory. This is a principal transaction where DEF acts as dealer, not broker. The market maker stands ready to buy even when there are no other buyers, which is the core purpose of market making: ensuring orderly markets and immediate execution. Option A is incorrect because market makers act as principals (dealers) trading from their own account, not as brokers (agents) searching for counterparties. Option C is incorrect because market maker obligations require continuous quotes and immediate execution, not waiting for better conditions. Option D is incorrect because market makers execute trades, they do not provide investment advice.

C is correct. Market makers primarily profit from the bid-ask spread: they buy securities at the lower bid price and sell at the higher ask price, earning the difference on each round-trip transaction. For example, if the bid is $49.90 and the ask is $50.10, the market maker earns $0.20 per share. Option A is incorrect because market makers act as principals (dealers) trading from their own account, not as brokers earning commissions. Brokers earn commissions; market makers earn spreads. Option B is incorrect because market makers typically do not hold securities for long-term appreciation. Their business model is based on high-volume trading and quick inventory turnover, not directional bets on price movements. Option D is incorrect. While some exchanges may provide rebates for liquidity provision, the primary profit mechanism is the bid-ask spread.

C is correct. When multiple market makers provide continuous quotes for a security, liquidity improves significantly. This means investors can buy or sell more easily, which typically reduces price volatility (fewer dramatic swings) and narrows the bid-ask spread (competition among market makers drives quotes closer together). With better liquidity, the stock might trade more smoothly within a tighter range, and spreads might narrow from, say, $0.50 to $0.20. Option A is incorrect because market makers facilitate trading for individual investors; they do not replace them. Increased market maker activity typically increases total trading volume. Option B is incorrect because competition among market makers typically narrows spreads, not widens them. When multiple market makers compete, they offer better prices to attract order flow. Option D is incorrect because market makers provide two-sided quotes (buying AND selling), which does not create directional price pressure. They facilitate trades rather than driving prices up.

C is correct (the EXCEPT answer). Market makers do NOT earn commissions as agents. They act as principals (dealers) and profit from the bid-ask spread by trading from their own inventory. This is a fundamental distinction: brokers act as agents and earn commissions; market makers act as principals and earn spreads. Option A is accurate: market makers commit to posting continuous two-sided quotes, meaning they must be ready to buy (bid) and sell (ask) throughout trading hours. This obligation ensures market liquidity. Option B is accurate: market makers always act as principals, meaning they trade from their own account and take ownership of securities (even if briefly). This is what distinguishes them from brokers who merely connect parties. Option D is accurate: the core purpose of market makers is to provide liquidity when natural buyers and sellers are not immediately available, preventing trading from grinding to a halt in less active securities.

B is correct (I and IV only). Statement I is TRUE: As a market maker, GHI will sell shares to the investor at the quoted ask price of $75.15 from its own inventory. This is a principal transaction where GHI acts as dealer. Statement IV is TRUE: Market makers have an obligation to honor their quoted prices and execute trades at those prices. When they post a bid of $74.85 and ask of $75.15, they must be willing to buy at $74.85 and sell at $75.15. Statement II is FALSE: Market makers act as principals (dealers), not agents. They do not earn commissions; they earn the bid-ask spread by trading from their own account. Statement III is FALSE: While market makers do profit from the bid-ask spread, they only earn it on round-trip transactions (buying low, selling high). In this single transaction, GHI is selling at $75.15, but has not yet bought these specific shares. The spread profit is realized when they both buy at the bid and sell at the ask, not on a single side of the transaction.