A market maker's quote is a promise to the market, and a halt or a manipulation can break that promise fast. This lesson covers how firms quote, when trading stops and what your surveillance must catch. Order handling is in the lesson before this one.
A market maker holds itself out as willing to buy and sell a security for its own account on a regular and continuous basis, publishing two-sided quotes. Quotation and Trading Obligations and Practices (FINRA Rule 5200 Series) keep market making and quoting activities honest:
- Offers at Stated Prices (FINRA Rule 5220): honor any offer at the price and on the conditions you stated.
- Publication of Transactions and Quotations (FINRA Rule 5210): publish only trades and quotations you believe are bona fide.
- Payments for Market Making (FINRA Rule 5250): accept no payment from an issuer, its affiliate or a promoter for quoting, making a market or applying to do either, except for...
If an order arrives while you are in the process of effecting a trade in that security and you communicate a revised quotation size immediately after that trade completes, you...
Common mistakes
- Freezing quotes in a pause. An LULD pause stops executions, not displayed quotes, and a Level 1 or 2 decline after 3:25 p.m. halts nothing.
- Taking an issuer's money to quote. Rule 5250 bars payment from an issuer for making a market.
- Pulling quotes on news. In a Nasdaq-listed stock, pending news and price changes don't excuse a withdrawal.
Bottom line
- Circuit breakers trigger at 7%, 13% and 20%; LULD pauses last five minutes after a 15-second limit state.
- Nasdaq market maker rules now sit in Equity 2, and participant registration in General 3, Rule 1032.
- A market maker honors an offer at its stated price and conditions, and Rule 5250 bars payment from an issuer for making a market.
- Rule 15c2-11 requires specified, current, publicly available issuer information before quoting, with exceptions such as a customer's unsolicited interest and the piggyback exception, which still needs current or timely filed issuer information.
Exam shortcut
When a stem shows trading while holding information, name what was known: a coming block points to Rule 5270, an unpublished report to Rule 5280, issuer secrets to Rule 10b5-1. Translate outline numbers like 4613 to Equity 2 and answer on substance. For halts, read the clock first.
The full lesson (about 3,694 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- D13
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