How do market makers contribute to the efficiency of the securities market?

Market makers play a vital role in the efficiency of securities markets primarily by providing liquidity and price stability. They do this by being ready to buy and sell securities at any time, which ensures that there are always participants in the market. This consistent presence allows investors to execute trades quickly and at transparent prices, reducing the time it takes to buy or sell an asset.

Liquidity is crucial because it signifies how easily an asset can be bought or sold in the market without significantly affecting its price. Market makers facilitate this by holding inventories of stocks, thus enabling smoother transactions for other market participants. In addition, their activities help to ensure that price fluctuations are minimized, leading to greater price stability.

In contrast, limiting the number of trades would hinder market function by reducing activity and could lead to inefficiencies. Issuing new stocks is typically the role of companies and underwriters, not market makers. Competition among brokers is essential for a healthy market, and market makers actually enhance competition by providing additional choices and avenues for executing trades. Hence, the role of market makers in providing liquidity and price stability is crucial for a well-functioning securities market.