Question

In a dealer market, some dealers hold a certain inventory of specific securities and create a liquid market by purchasing and selling their inventories. These dealers make a market and are thus called market makers. Agents in the market bring investors to the dealers through a network of terminals and electronic systems. Where do dealer profits come from in a dealer market?

- Interest charges
- Dividend payments
- The bid-ask spread

Answer 1

Option (C) is correct.

Step-by-step explanation:

Dealers profits come from the bid-ask spread in a dealer market. The bid-ask spread is a premium that come from bearing the risk. Most of dealers buy specific securities in wholesale and sell it in retail. The dealer's profit is the difference between the maximum purchase price made by the buyer and the least price at which seller wants to sell their securities. Hence, the difference between these two terms represents the dealer's profit that is bid-ask spread.