What is a Firm Quote?

A firm quote is a bid to buy or offer to sell a security or currency at the firm bid and ask prices, that is not subject to cancellation. In simple terms, it's the level that the market maker will provide liquidity to a counter party.

Key Takeaways

  • Broker-dealers and market makers have special functions in the securities markets because they handle orders for customers, as well as trading for their own accounts. That is why they have to comply with specific SEC rules regarding the publishing of quotes and handling customer orders, under the Securities Exchange Act of 1934.
  • Failure by a market maker to honor the quoted bid and ask prices for a minimum quantity is a serious violation of industry regulations, known as backing away. NASD Regulation Inc, which carries out the regulatory functions of the National Association of Securities Dealers and oversees markets operated by NASDAQ, uses an automated surveillance system to enable resolution of backing-away complaints in real time.

Even on Wall Street trading desks there are firm quotes. A customer may call the desk and ask for a live market on a block of stock, options, or ETFs. The trader will go through a quick checklist before providing the quote. Once the firm quote is made, the customer has the opportunity to transact at the stated price or do nothing. Generally speaking, when a block is being priced up by a market making desk, the price quoted is determined by a culmination of many factors including: asset liquidity, event risks, positioning, and market news among other things.

How a Firm Quote Works

Broker-dealers and market makers have special functions in the securities markets because they handle orders for customers, as well as trading for their own accounts. That is why they have to comply with specific SEC rules regarding the publishing of quotes and handling customer orders, under the Securities Exchange Act of 1934.

A firm quote is non-negotiable, according to SEC Rule 11Ac1-1 — its firm quote rule. It is a take it or leave it offer. The market maker who published it is obliged to execute an order that is presented to it, at a price and size that is at least equal to its published firm quote.

Failure by a market maker to honor the quoted bid and ask prices for a minimum quantity is a serious violation of industry regulations, known as backing away. NASD Regulation Inc, which carries out the regulatory functions of the National Association of Securities Dealers and oversees markets operated by NASDAQ, uses an automated surveillance system to enable resolution of backing-away complaints in real time.

Example of a Firm Quote

For example, if a market maker posts a firm bid of $25 for 10K, this tells other dealers or traders that the market maker will buy 10,000 shares for a price of $25. Firm quotes differ from nominal quotes, where the price and quantity of a bid or ask quote are still negotiable.

Another example would be if a buy side firm calls a Wall Street trading desk to price up a block of 1,000,000 shares of an ETF. Let's assume the ETF is priced at 83.48 x 83.52 on the screens. Additionally, sometimes the customer will not reveal their direction on the trade, thus not allowing the market maker that information. After the bank (market maker) goes through their checklist, they make a quote of 83.45 x 83.53 - each side for 1,000,000 shares. Because the customer is in fact a buyer, they decide to lift the market maker's offer at 83.53 for the million shares.