Series 7 Exam Question 125: Answer and Explanation

Question: 125

If the inside market for an AAD common stock is 50.20–50.35, where can a Designated Market Maker enter an order to sell from their own inventory?

• A. 50.20
• B. 50.30
• C. 50.35
• D. 50.36 or higher

Correct Answer: B

Explanation:

B. Remember, it is the Designated Market Maker's (DMM) job to keep trading as active as possible. If the bid and ask prices are too far apart and trading slows down, a DMM may enter an order to buy or sell securities out of their inventory in between the bid and ask prices to narrow the spread. At no point can a DMM enter a quote at the same price as a customer's order because a DMM is not allowed to compete with public orders.