What is the role of market makers in liquidity?

Market makers play a crucial role in enhancing liquidity in financial markets by facilitating the buying and selling of securities. They achieve this by consistently offering to buy (bid) and sell (ask) stocks and other financial instruments, ensuring that there is always a counterparty available for trades. This consistent presence helps to narrow the bid-ask spread, making it easier for investors to enter and exit positions without significantly affecting the price of the security.

By providing this service, market makers ensure that there is sufficient liquidity in the market, allowing for smoother transactions and reducing the costs associated with trading. The ability to quickly buy and sell securities without large price fluctuations encourages investors to participate in the market, thereby fostering greater overall market activity. This is foundational for efficient market operation, as it allows participants to transact freely, reflecting more accurate pricing information.

Other choices do not accurately capture the essential function of market makers. They do not focus on increasing the number of investors directly or on eliminating volatility, and they do not impose restrictions on trading hours. Instead, they primarily serve to facilitate easier trading by maintaining liquidity, which ultimately supports a healthier market environment.