Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What is the primary role of market makers in financial markets?

1. To provide research and analysis to investors

2. To quote firm two-way prices

3. To make investment decisions on behalf of clients

4. To regulate market transactions

The correct answer is: To quote firm two-way prices

The primary role of market makers in financial markets is to quote firm two-way prices. This means they continuously provide buy (bid) and sell (ask) prices for a security, ensuring there is liquidity in the market. By doing this, market makers facilitate the execution of trades and help stabilize market prices. Their presence allows for smoother transactions, as they are willing to buy and sell securities at moment’s notice, thus reducing the bid-ask spread and enhancing market efficiency. Market makers play a crucial role in maintaining an orderly market. Their ability to absorb excess selling or buying pressure prevents large fluctuations in price. Without market makers quoting these prices consistently, investors could face significant difficulty in buying or selling shares without impacting the market price negatively, which can lead to wider spreads and increased volatility. The other options, while important in their own right, do not primarily define the role of market makers. Providing research and analysis, making investment decisions, or regulating market transactions are typically functions associated with other participants in the financial markets, such as analysts, portfolio managers, or regulatory bodies. Thus, the unique responsibility of market makers lies specifically in quoting firm two-way prices to facilitate trading.