DEFINITION of 'Backing Away'

The term backing away refers to the failure by a market maker in a security to honor the quoted bid and ask prices for a minimum quantity. Backing away constitutes a serious violation of industry regulations. NASD Regulation Inc. uses an automated market surveillance system to enable the resolution of backing-away complaints in real time. Backing away is usually frowned upon, and can lead to disciplinary action against the market maker who has backed away.

BREAKING DOWN 'Backing Away'

Let’s say that an investor wants to buy 1,500 shares of Company X. Bank Y is the market maker for this stock, and advertises at 9:00 a.m. on Tuesday that the bid for Company X’s stock is $35.67, and its asking price is $36. The investor places an order to buy 1,500 shares at $36, but Bank X suddenly backs away from the price, claiming that the bid is now $35.97 and the ask is now $36.50. This is in violation of the firm-quote rules established by the SEC, FINRA and other regulatory bodies that require market makers to execute orders at their displayed quotation, and could result in disciplinary action.

However, there are some circumstances under which a market maker does not have to abide by these firm-quote rules. One such circumstance might be if the market maker sends a quote change to the exchange before an investor presents an order. Another might be if the market maker is in the process of filling an order and changes the stock price before it is, or should reasonably be, aware that another order has been placed; it does not have to fill the new order at the old price.

Backing Away Complaint

Backing away constitutes a breach of SEC Rule 11Ac1-1 or the firm quote rule, which requires a market maker to execute an order presented to it at a price at least as favorable as its published quotation, up to its published quotation size. A potential backing-away complaint has to be brought to the attention of the Market Regulation Department within five minutes of the alleged offense. Otherwise, it may be difficult for department staff to obtain a contemporaneous trade execution from the market maker.

NASD Regulation does not pursue immediate disciplinary action for an individual backing-away complaint where a contemporaneous trade execution from the market maker is obtained or offered. However, department staff keep a record of such transgressions, and repeated non-compliance with the firm quote rule could result in disciplinary action.

RELATED TERMS
  1. Firm Quote

    A firm quote is a bid to buy or offer to sell a security or currency ...
  2. Level 3

    A trading service consisting of everything in Level 2, plus the ...
  3. Trade Reporting And Compliance ...

    TRACE is a program that allows for the reporting of over-the-counter ...
  4. Indicative Quote

    An indicative quote is a forex price provided by a market maker ...
  5. Order Audit Trail System - OATS

    The Order Audit Trail System ( OATS) is a computer system used ...
  6. Trade Or Fade Rule

    An options exchange rule that requires the market maker to either ...
Related Articles
  1. Investing

    Resolving Disputes With Your Financial Advisor

    Before you blame your advisor for your losses, be sure you know your rights and responsibilities.
  2. Insights

    8 Biggest Global Trade Offenders

    Countries launch protectionist policies to keep domestic producers safe. We list the top eight offenders.
  3. Financial Advisor

    Investigating The Securities Police

    Learn about the history of FINRA and how this organization protects investors.
  4. Retirement

    Watch Your Back In The Annuity Game

    Find out how to get the upper hand when dealing with this payout challenge.
  5. Insights

    The Pitfalls Of Financial Regulation

    Regulatory actions usually have lofty intentions that end up with unintended and negative consequences.
  6. Insights

    FINRA: How It Protects Investors

    Find out the history of FINRA, and how it's organized to monitor the markets and protect investors.
  7. Insights

    Why is the SEC Afraid of Bitcoin ETFs?

    The SEC denied several Bitcoin ETF applications in the last few weeks. Why?
  8. Financial Advisor

    What Advisors Need to Know About Rule 3210

    Here's what advisors and brokers need to know about FINRA Rule 3210.
RELATED FAQS
  1. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
  2. To what extent does government regulation impact the electronics sector?

    Learn more about production regulation in the electronics industry and how these regulations may contribute to lesser productivity ... Read Answer >>
  3. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
  4. 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. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center