What does the term "market maker" refer to?

The term "market maker" refers to a firm that provides liquidity for securities. Market makers play a crucial role in financial markets by quoting both a buy and a sell price for securities, ensuring that there is always a buyer and seller available. Their presence helps to facilitate trading and ensures that investors can buy and sell securities without significant delays or price fluctuations. By maintaining an inventory of the securities they trade, market makers can quickly execute orders, thus enhancing market efficiency.

The role of market makers is essential because they help stabilize prices by absorbing excess supply or demand. Their activity leads to tighter bid-ask spreads, making it less costly for investors to enter and exit positions. This liquidity provision is vital for the smooth functioning of financial markets, as it can also lead to improved price discovery.

In contrast, other options do not accurately capture the essence of a market maker's role. Firms that create new securities are involved in the process of underwriting and issuing, stock exchanges are platforms for trading rather than entities that directly manage trading behavior, and firms that audit financial statements are focused on verifying the accuracy of financial reports rather than facilitating security trades.