Which situation best illustrates market-making?

Market-making involves a firm or individual providing liquidity in securities markets by consistently quoting prices at which they are willing to buy and sell a particular security. This process helps facilitate trading by ensuring that there are always prices available for market participants who want to execute trades.

The option that illustrates this best is one where a firm consistently provides quotes for a stock. By doing this, the firm stands ready to buy and sell the stock, which means it can fill orders from buyers and sellers, thus enhancing market efficiency and reducing spreads. The act of continuously offering quotes and being willing to trade contributes to a more liquid market, enabling investors to enter and exit positions more freely.

In contrast, the other options are less aligned with the concept of market-making. For instance, a trader waiting for stock prices to increase describes a speculative strategy rather than providing liquidity. Similarly, a hedge fund investing in real estate focuses on asset acquisition rather than market-making. Lastly, an investor targeting undervalued securities implies a strategy of buying and holding based on perceived value, which doesn’t involve actively providing quotes to facilitate trades in a market context.