Commissions And Trade Complaints - Dominated And Controlled Markets

FINRA’s 5% mark up policy is a guideline for charging mark ups and commissions for transactions  in  securities  with  active  and  competitive  markets.  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 mark up charged to the customer on their contemporaneous cost, not on the inside market for the security.

Example:

Market Maker 1 is one of two market makers in MNBV an OTCBB security. Market Maker 1 brought MNBV public and is the only firm with a retail sales force recommend- ing the stock to its customers. Market Maker 1 has been accumulating shares from its customers who are selling MNBV at 6.00 per share, when the market for MNBV was 6.25 – 6.75. After accumulating a significant number of shares Market Maker 1 raises its quote to 10.00 – 10.50 knowing that it will not have to purchase shares from other dealers at this level. In this case if market maker 1’s sales force recommends MNBV to its customers and the customer purchases the stock at the current market price of 10.50 plus a 50 cent mark up, Market Maker 1 would have a profit of $5 per share. Because Market Maker 1 can display any quote it wants for the stock, the inside market displayed may not have any relation to the actual market for the stock. In these cases, the mark up must be based on Market Maker 1’s actual cost for the security or 6.00 in this example.

Firms and registered representatives who charge or receive excessive mark ups can be held accountable for their actions. Traders who execute the transaction can also be held accountable for excessive mark ups, as one of the responsibilities of a trader is to determine the inside market for a security in addition to executing orders.

Net Transactions With Customers


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