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