Question

What is Market Making?
a) It transfers goods from low value use to high value use hence wealth is created.
b) Market making cannot take place if transaction costs are very high thereby to prevent value creating transactions.
c) It brings high value buyers and low value sellers together.
d) all of the above

Answer 1

Option D

The market makers are the participants which buys and sells the securities in large volumes and thus create the market as well as the liquidity in the market. A retail might wanted to sell only small quantity of shares but he will be needed a buyer to complete the transaction. The market maker buys those shares and keeps inventory of shares.
A market makers quotes both prices that is bid and ask price and he generates profit from the difference between those prices. A lower transaction cost naturally increases the profit and conversely a higher transaction cost decreases the profit and so as the market making activity.

The market making activity increases the value of the securities of the company as it brings the liquidity and so it encourages more market participants and also creates a demand and supply. This ultimately results in wealth creation in the market.