What exactly is a dominated and controlled market, and how does it imp...

Market makers who take on risk in liquid securities base the mark up on the inside market for that security. Meaning the firm’s inventory cost for the security is irrelevant. For example, Let’s assume the market for a stock is: $25 bid and offered $25.20. A market maker who accumulated the stock over a number of days has an average cost of $22. If the firm receives a customer market order to buy the stock, it would base the mark up on the best offer of $25.20. The fact that the firm owns the stock at $22 per share is not considered. Nor would it matter if the firm had an average cost of $28 per share. Some small OTC securities do not have active and competitive markets because of lack of national interest in the company. As a result, the market for these securities can be dominated or controlled by one market maker. Market makers who dominate or control the market for a security must base the markup charged to the customer on their contemporaneous cost, not on the inside market for the security. All markups will be based on the price the market maker paid for the stock when it was purchased for their inventory account. On your exam if the question notes that the firm is responsible for 70 percent of the volume in the stock, this is letting you know that the firm in question is dominating the market. As a result the firm must base the mark up on their inventory cost.