2016-FRR Exam Dumps | Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

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GARP.2016-FRR.v2024-09-09.q145
Question 42

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Question 42/145

Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

A. A market maker that attracts buy and sell orders can make a profit from the spread quoted between the buy and sell price.

B. A market maker can benefit from the market information she gets from the trades she is asked to execute.

C. This strategy is independent of market liquidity and number of other market makers.

D. This risk in this strategy is that traders have to take positions that may quickly incur a loss.

Correct Answer: C

Market-making involves providing liquidity by being ready to buy and sell securities at any time. The profitability and functioning of a market-making strategy depend on several factors, including:
* Profit from the Spread:
* Market makers profit from the difference between the buy (bid) price and the sell (ask) price.
* Market Information:
* Market makers can benefit from the information they obtain through the trades they execute.
* Liquidity and Competition:
* The success of a market maker is highly dependent on the market's liquidity and the number of other market makers. More liquidity and less competition typically enhance the profitability of market makers.
* Risk of Holding Positions:
* Market makers may incur losses if they hold positions that quickly move against them.
Therefore, the incorrect statement is that the market-making strategy is independent of market liquidity and the number of other market makers.
ReferencesSource: How Finance Works

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