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

Related Articles
  1. Investing

    Electronic Trading: The Role of a Market Maker

    Market makers compete for customer order flows by displaying buy and sell quotations for a guaranteed number of shares. The difference between the price at which a market maker is willing to ...
  2. Trading

    Market Makers Vs. Electronic Communications Networks

    Learn the pros and cons of trading forex through these two types of brokers.
  3. Investing

    Electronic Trading: Level I, II and III Access

    There are a variety of ways in which Nasdaq quotes security prices to the public. These levels vary on the amount of information and access they provide to investors. Level I This type of quote ...
  4. Investing

    What's a Dealer Market?

    In a dealer market, market participants buy and sell through dealers who are designated as market makers.
  5. Trading

    Introduction To Level II Quotes

    Find out what's happening in a given stock with this service showing Nasdaq market makers' best bid and ask prices.
  6. Investing

    What Happens in a Haircut?

    One meaning of haircut is the difference between prices at which a market maker can buy and sell a security.
  7. Investing

    Designated Market Maker

    A designated market maker maintains fair and orderly markets for an assigned set of listed firms and improves market liquidity.
  8. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  9. Trading

    How To Avoid Closing Options Below Intrinsic Value

    To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade.
  10. Trading

    The Foreign Exchange Interbank Market

    Can your forex broker offer you the most competitive pricing? Learn how the market's biggest players affect you.
Trading Center