Making a Market vs. Taking a Market

Suppose the current buy orders for a stock are USD 34, USD 35, USD 36, and USD 37, and the best offer (ask) is USD 41. If a new buy order was to be placed at USD 36.50, would it make a new market?
Incorrect. A new market would not be made.
Correct! It would not make a new market.
A trader is deemed to be __making a market__ when he or she offers to trade. Alternatively, he or she would be __taking a market__ by accepting an offer to trade. Suppose a trader anticipates significant price appreciation in the coming days for a given stock. If he were to initiate a transaction, figuring that being proactive will ultimately benefit him, he would likely be doing which of the following?
Incorrect. Had this trader accepted an offer to trade if one had been presented to him, he would have been taking the market. However, the trader initiated the trade and is said to be making a market.
That's right! By offering to trade, this trader would be deemed to be making a market.
Traders place standing limit orders, which are limit orders that are __behind the market__ and are waiting to trade, to provide other traders opportunities to trade. Standing limit orders, therefore, _make markets_. Suppose the buy orders for a stock are currently USD 10, USD 11, and USD 12, and the best offer (ask) is USD 15. Which of the following depicts a taking-the-market scenario?
Incorrect. If the trader had placed a buy order at USD 9, he would not be taking the price the market is giving at all. He would be seeking to buy the stock at or below USD 9.
Incorrect. If the trader had placed a buy order at USD 13, he would not be taking the price the market is giving. He would be seeking to buy the stock at or below USD 13.
Correct! By putting in a market order, the trader is said to be taking the market, since he will essentially be taking whatever price the market provides him.
In summary: [[summary]]
Buyers and sellers of securities can utilize different strategies when seeking to have their orders executed. These strategies can impact if, and when, an order is executed and the price at which this task is accomplished. If a buy (limit) order is placed above the best bid, but below the best offer (ask), the order is said to be making a new market because it becomes the new best bid.
A USD 36.50 buy order, although higher than most existing bids, would still be below USD 37, the highest bid. Had the new buy order been USD 37.50, instead of USD 36.50, it would have become the new best bid and made a new market. In that case, it likely would not have been executed immediately, since it would still be below the best offer (USD 41). However, it probably would have attracted attention from sellers.
A buy order placed _at_ the best bid is said to _make market_. Such an order might need to wait until all other buy orders at that price are executed. Conversely, a sell order that is placed between the best bid and the best offer makes a new market, whereas one placed at the best offer makes market.
Yes
No
Taking a market
Making a market
The trader places a buy order at USD 9
The trader places a buy order at USD 13
The trader places a market order
Continue
Continue
Continue
Continue
Continue
Continue

The quickest way to get your CFA® charter

Adaptive learning technology

10000+ practice questions

10 simulation exams

Industry-Leading Pass Insurance

Save 100+ hours of your life

Tablet device with “CFA® Exam | Bloomberg Exam Prep” app