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.

Need Help Passing Your Series 57 Exam?



Net Transactions With Customers

Related Articles
  1. Insights

    What's a Dealer Market?

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

    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.
  3. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  4. Investing

    What's an Over-The-Counter Market?

    The over-the-counter market is a decentralized market in which unlisted securities trade.
  5. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  6. Trading

    Know Your Counterparty When Day Trading

    This can provide insight into how the market is likely to act based on your presence, orders and transactions.
  7. Small Business

    Understanding Marketing

    Marketing includes all of the activities of a company associated with buying and selling a product or service.
  8. Trading

    Introduction To Level II Quotes

    Level II quotes show a ranked list of the best bid and ask prices from each market participant, providing detailed insight into a stock’s price action.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center