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.

Trade Complaints Between Members


Related Articles
  1. Professionals

    D. NASDAQ

    Securities that are not listed a centralized exchange trade over the counter or on the NASDAQ. NASDAQ stands for National Association of Securities Dealers Automated Quotation System. It is the ...
  2. Professionals

    Piggybacking A Quote

    If an OTC BB security has been quoted by another dealer for a minimum of 30 days, they may simply enter their own quote by piggybacking the current dealer’s quote so long as: The security ...
  3. Professionals

    Introduction

    In addition to the requirements to become a market maker, firms must follow strict guide- lines when acting as a market maker. Market makers must adhere to all rules relating to their participation ...
  4. Professionals

    Order Qualifiers

    FINRA Series 6 Exam Study Guide - Order Qulaifiers. This section deals with different types of orders and quotations.
  5. Retirement

    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 ...
  6. Retirement

    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 ...
  7. Professionals

    Withdrawing Quotes

    There are two ways that a market maker may withdraw their quotes for a security. A market maker may withdraw their quotes either on a voluntary basis or on an excused basis. If a market maker ...
  8. Professionals

    NASDAQ Execution Systems

    Most NASDAQ trades are executed over the NASDAQ workstation using one of its automated execution systems. These systems allow dealers to execute orders without having to speak with one another ...
  9. Professionals

    Market Makers

    Because there are no specialists for the over the counter markets, bids and offers are displayed by broker dealers known as market makers. A market maker is a firm that is required to display ...
  10. Professionals

    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 ...
RELATED TERMS
  1. Indicative Quote

    In forex trading, a currency quote that is provided by a market ...
  2. Firm Quote

    A price quote on a security, made by a dealer or market maker, ...
  3. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
  4. Backing Away

    Failure by a market maker in a security to honor the quoted bid ...
  5. Level 2

    A trading service consisting of real-time access to the quotations ...
  6. Trade Or Fade Rule

    An options exchange rule that requires the market maker to either ...
RELATED FAQS
  1. How do financial advisors execute trades?

    Understand how financial advisors normally execute an investor's trades. Learn about the different type of markets and exchanges ... Read Answer >>
  2. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  3. What is the difference between a quote driven market and an order driven one?

    The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask ... Read Answer >>
  4. What are the steps to get a company listed on the OTCBB?

    The over-the-counter bulletin board (OTCBB) is a regulated quotation service for over-the-counter (OTC) securities. The securities ... Read Answer >>
  5. How do I buy an over-the-counter stock?

    The process of purchasing over-the-counter (OTC) stocks is different than purchasing stock from companies on the NYSE and ... Read Answer >>
  6. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center