If a market maker accepts customer limit orders, it must handle the order in accordance with The Limit Order Display Rule. If a market maker accepts a customer’s limit order that would improve its quoted price, the market maker must update its quote to reflect the customer’s limit order. A market maker is required to update its quote within 30 seconds of receiving the customer’s order. The 30-second time frame only applies to normal market conditions and does not include the opening or reopening of a security after a halt.

Example:

In the market for XYAD listed below the inside market is 15.00 bid and 15.05 offered. The size of the bid is for 500 shares and there are 300 shares offered

XYAD

  Bid Ask Size
  15.00 15.05 5 x 3

MM 1

14.90

15.10

10 X 10

MM 2

15.00

15.20

5 X 5

MM 3

14.85

15.05

2 X 3

MM 4

14.95

15.15

15 X 15

MM 5

14.98

15.18

10 x 10

If market maker 2 who is the best bid received a customer’s limit order to buy 200 shares at 15.02 the market maker would have to update its quote and the market would look as follows:

XYAD

  Bid Ask Size
  15.02 15.05 2 x 3

MM 1

14.90

15.10

10 X 10

MM 2

15.02

15.20

5 X 5

MM 3

14.85

15.05

2 X 3

MM 4

14.95

15.15

15 X 15

MM 5

14.98

15.18

10 x 10

If market maker 2, who is the best bid, instead had received a customer’s limit order to buy 1000 shares at 15.00, the market maker would have to update its quote by adding the customer’s size to its current quote and the market would look as follows:

XYAD

  Bid Ask Size
  15.00 15.05 15 x 3

MM 1

14.90

15.10

10 X 10

MM 2

15.00

15.20

15 X 5

MM 3

14.85

15.05

2 X 3

MM 4

14.95

15.15

15 X 15

MM 5

14.98

15.18

10 x 10

If the customer’s limit order is equal in price to the firm’s displayed quote but is 10% or less than its displayed size, the firm does not have to update the size of its quote to reflect the customer’s order.

Orders that are not required to be displayed include:

  • Odd lot orders
  • All or none orders
  • Block orders for at least 10,000 shares or $200,000 in market value
  • Orders sent to a qualifying ECN
  • Orders sent to another market maker that complies with the display rule
  • Orders that the customer request not be displayed
  • Orders that are immediately executable

In order for an ECN to be considered a qualifying ECN under the ECN Display Alternative Rule, the ECN must communicate its quotes to NASDAQ and must allow access to its quotes to broker dealers who do not subscribe to the ECN’s service. The ECN may charge a fee to non-subscribing broker dealers who execute orders against its quotes. If a broker dealer sends a customer’s limit order to a qualifying ECN to be displayed it does not need to improve its quote in NASDAQ. If the broker dealer sends a customer order a non-qualifying ECN, the market maker must update its quote to reflect the customer’s order. A qualifying ECN is also known as a linked or eligible ECN. The broker dealer who sends a customer’s order to a qualified ECN may not trade ahead of the customer’s order displayed by the ECN at a price that would satisfy the customers limit order.

TAKE NOTE !

A firm that does not want its customer orders executed against its own quotes may turn on the Anti Internalization Qualifier (AIQ) feature. This will prevent a customer’s order entered by the firm from being executed against its own quote.

Anonymously Displaying Customer Orders

At times there may be reasons that a market maker does not want to change the price of its displayed quote or want to add the customer’s order to its displayed size. In these situations, the market maker may anonymously display the customer’s order through the “NSDQ” function available through the NASDAQ system. The NSDQ function is available to all market makers and displays the total number of shares routed to the NSDQ function at the best price by all participants. Orders routed to the NSDQ function cannot be attributed to the market maker who received the order. As a result orders that are displayed anonymously are considered “non attributable” orders. Orders that appear with the market participant’s ID are considered attributable orders since other market participants know the identity of the firm entering the order.

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