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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Which statement about market makers and bid-offer spreads in exchange-traded markets is most accurate?

Market makers quote both bid and offer prices and earn the spread as payment for supplying liquidity and bearing inventory risk. Guaranteeing trades is the clearing house's role, and settlement prices are determined by exchange procedures.

  1. AMarket makers quote both bid and offer prices and earn the spread as compensation for providing liquidity and bearing inventory riskCorrect
  2. BMarket makers take only directional positions and never quote two-sided prices
  3. CMarket makers guarantee performance of all trades through the margin system
  4. DMarket makers set the settlement price used for daily margining

Explanation

Market makers post two-sided quotes and earn the bid-offer spread for supplying liquidity and bearing inventory risk. Guaranteeing performance is the role of the clearing house, and settlement prices are set by the exchange procedures, not by individual market makers.

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