Series 55

Commissions And Trade Complaints - Firm Quote Rule

SEC Rule 11Ac1-1 states that all market makers who publish quotes over the NASDAQ system must execute an order that is presented to the firm, at a price and size that is at least equal to its published quote. Any quote displayed by a market maker and not accompanied by a size will be assumed to be a quote for the normal trading unit in that security. A market maker is not bound by the firm quote rule under the following circumstances:

  • The market maker is publishing a quote for a security not covered by the rule.
  • The market maker has just executed a trade and is in the process of updating its quote.
  • The market maker has just updated and published a new quote and the new quote was published prior to, or at the same time as the receipt of the order.
The market maker’s firm quote obligation is triggered when the order is presented. SEC Rule 11Ac1-1 provides the following definitions for “the firm quote rule”:

OTC Market Maker: Is a firm that stands ready to buy or sell securities and does so on a regular basis. A market maker includes a firm that publishes quotes as well as a firm that does not publish quotes but stands ready to internalize order flow.

Covered Security: Any security for which last sale data is reported or that is quoted through an automated quote system

Subject Security: Any exchange traded security for which a member acts as an OTC market maker.

TAKE NOTE!

A market maker who fails to honor their firm quote has committed a violation known as “backing away”.

Liability orders create firm quote obligations for the market maker. Should a liability order expire or be canceled prior to execution, the market maker is still required to offer the counter party an execution. If a liability order expires or “times out” and the receiving market maker fails to honor the order or offer the party an execution, the market maker could be found to have committed a backing away violation.

The Firm Quote Compliance System / FQCS

To assist in the enforcement of the firm quote rule and to assist in the resolution of backing away allegations FINRA has developed the Firm Quote Compliance System (FQCS). A firm that feels that a market maker failed to honor their quote must file a complaint within five minutes of the incident. The Market Regulation Department will enter the complaint into the FQCS. The FQCS allows FINRA to review the market conditions at the time of the allegation and to look for patterns of backing away. If FINRA feels that a firm failed to honor its quote it will usually award the aggrieved party a contemporaneous execution. A contemporaneous execution will result in a transaction at a price that is representative of the market conditions at the time of the allegation. If the aggrieved party fails to file a compliant within five minutes it does not relive the firm who allegedly backed away of responsibility. However, failing to file a complaint on a timely basis makes the award of a contemporaneous execution less likely.


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