Every price on a trading screen is a promise of some strength, and every order tells the market how much price risk a customer accepts. Some promises bind a dealer on the spot, some bind no one, and some orders wait for a trigger that never comes.
A market maker posts a quote: a bid it will pay and an offer at which it will sell. Other firms trade on those numbers. The Financial Industry Regulatory Authority (FINRA) therefore requires each member to say how far a quote commits it.
- Firm quote: The dealer must trade at least a normal unit of trading at the quoted price when someone accepts.
- Subject quote: The price is real, but it must be reconfirmed before anyone can trade on it ("20 bid, subject").
- Workout quote: This subject quote gives an approximate range for a large or thinly traded order. The dealer needs time to arrange the trade.
- Nominal quote: A nominal quote is an indication only, such as a price for valuing a position. It must be labeled nominal when given.
Common mistakes
- Buy stop below the market. With XYZ at $40, a buy order at $38 is a buy limit. A buy stop belongs above $40.
- Assuming 100-share firm quotes. A $600 stock's normal unit is 40 shares, and a $1,500 stock's is 10.
- Swapping FOK and IOC. Take 5,000 shares with only 3,000 available. IOC fills 3,000 and cancels 2,000, while FOK cancels all 5,000.
Bottom line
- Firm quotes bind for a normal unit, the price-tiered round lot of 100, 40, 10 or 1 share; refusing to honor one is backing away under FINRA Rule 5220.
- Subject and workout quotes must be reconfirmed, nominal quotes are information only, and any stated price or advertised yield must be honored on its stated conditions.
- Quotes must be bona fide (Rule 5210), disclose another dealer or joint account (SEC Rule 15c2-7) and rest on current issuer information (SEC Rule 15c2-11); penny stock customers get the inside quotes and firm compensation before the trade.
- Buy limits and sell stops sit below the market, sell limits and buy stops above; limits risk no fill, triggered stops risk a worse price, stop-limits risk both.
Exam shortcut
Sketch a price line before any order question. Below the market sit Buy Limits and Sell Stops ("BLiSS"). Above it sit Sell Limits and Buy Stops. Then translate the stem: "Must reconfirm" means subject, and "information only" means nominal. "All of it, right now" is FOK. "Whatever fills now" is IOC. "All of it, whenever" is AON. "Not held" ends any missed-price complaint.
The full lesson (about 3,731 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- D31
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