Which of the following best describes a market where dealers provide liquidity by buying and selling stocks for themselves?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Quote-driven markets are characterized by dealers (market makers) who commit capital and continuously post bid and ask quotes, so they buy and sell stocks for their own accounts to provide liquidity.

1. Relevant knowledge points and concepts
- Dealer/market-maker model: dealers maintain inventories, post two-sided quotes (bid/ask), and trade on their own account. They earn the bid-ask spread as compensation for providing immediacy and bearing inventory and adverse-selection risk.
- Order-driven model: trading is done by matching buy and sell orders from participants; liquidity comes from limit orders in an order book rather than dealers’ inventories.
- Call-auction / batch markets: orders are accumulated and matched at discrete times to determine a single clearing price (not continuous dealer quoting).

2. Step-by-step reasoning
- The question asks for the market type where dealers provide liquidity by buying/selling for themselves.
- That description fits the dealer/market-maker role: posting quotes and trading from proprietary inventories.
- Therefore the market type is quote-driven.

3. Calculations / intermediate steps
- No numerical calculations are required; the reasoning is conceptual.

4. Why the correct answer is correct
- In quote-driven markets, dealers display quotes and stand ready to trade at those prices. They therefore provide immediate liquidity by transacting from their own balance sheets — exactly the behavior described in the question.

5. Why the other options are incorrect
- b. Call auction markets: liquidity is provided by pooling orders and matching them at discrete auction times, not by dealers trading for themselves.
- c. Batch markets: similar to call auctions — orders are batched and matched; liquidity is order-based rather than dealer-provided.
- d. Order-driven markets: liquidity comes from participants’ limit orders in an order book; there is no requirement that dealers trade from their own accounts.

6. Conclusion
- The correct choice is a. Quote driven markets, which matches the provided answer.

Which of the following best describes a market where dealers provide liquidity by buying and selling stocks for themselves?[Fill in the blank]Single choice

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Which of the following best describes a market where dealers provide liquidity by buying and selling stocks for themselves?[Fill in the blank]Single choice

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