Specialists try to maintain a narrow bid-ask spread because:
I. If the spread is too large, they will not participate in as many trades, losing commission income.
II. The exchange requires specialists to maintain price continuity.
III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

Question

Quizplus · Accepted Answer

Specialists are market makers who facilitate trading by posting buy and sell orders for securities they are responsible for on the exchange. They earn a profit by buying securities at the bid price and selling them at the ask price. If the bid-ask spread is too wide, it will discourage trading and reduce the number of transactions, resulting in lower commission income for the specialist. Additionally, exchanges require specialists to maintain price continuity to prevent large price swings and ensure fair and orderly markets. While specialists are not for-profit entities, they do earn a profit through bid-ask spreads and may face competition from other market makers if their spreads are too wide. Therefore, maintaining a narrow bid-ask spread is beneficial for both the specialist and the market as a whole.

Specialists Try to Maintain a Narrow Bid-Ask Spread Because