4-61 An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called

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This practice is called a principal transaction, where the market maker buys and holds the securities in its own inventory with the intention of selling them later at a higher price, earning a profit on the price movements. Risk arbitrage involves buying and selling securities in anticipation of a merger or acquisition, best efforts underwriting involves an underwriter who tries to sell securities but is not committed to buying any unsold shares, and spinning involves allocating IPO shares to corporate executives in exchange for future business. An agency transaction involves a broker acting as an agent for a customer to execute a trade.

4-61 an Attempt by a Market Maker to Earn a Profit