Chartered Financial Analyst (CFA) Level 3 Practice Exam

In a quote-driven market, dealers play a significant role by providing continuous bid and ask quotes for securities. This market structure allows buyers and sellers to see the prices at which dealers are willing to sell (ask) and buy (bid) securities, facilitating trading. Essentially, dealers act as market makers, ensuring that there is liquidity by being ready to buy or sell at the quoted prices. This characteristic leads to a situation where the market is primarily reliant on the quotes provided by the dealers rather than public orders alone.

The other options, while relevant to trading mechanisms, do not capture the primary characteristic of a quote-driven market. For instance, executing transactions through brokers is more indicative of an agency market. Similarly, while public orders can contribute to liquidity, a quote-driven market emphasizes the role of quotes dictated by dealers rather than the direct influence of public orders. Finally, trades executed based on public limit orders pertain more to order-driven markets, where trades are placed at specified prices and executed when the market meets those prices, which is a different mechanism from the quote-driven structure defined by dealer quotes.

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