Principal transactions refer to when market makers take long or short positions to seek profits on price movements. In addition to this, market makers also take inventory positions to stabilize the market in the securities. Therefore, option E is the best choice as it covers both aspects of market-making. Option A only covers one aspect, option B only covers one aspect and is not a complete explanation, and option C only covers one aspect, while D covers both aspects but is not as comprehensive as option E.

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In Market-Making

Question 49

Multiple Choice

In market-making

A) principal transactions are two-way transactions on behalf of customers, such as a dealer working for a fee or commission.
B) principal transactions are when market makers take long or short positions and seek profits on price movements.
C) market makers take inventory positions to stabilize the market in the securities.
D) principal transactions are two-way transactions on behalf of customers; and market makers take inventory positions to stabilize the market in the securities.
E) principal transactions are when market makers take long or short positions and seek profits on price movements, and market makers take inventory positions to stabilize the market in the securities.

Correct Answer: