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Author Topic: Market Maker & Trader Questions Answered  (Read 7780 times)

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The Web Team

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Market Maker & Trader Questions Answered
« on: February 24, 2007, 09:32:21 PM »
Do I still have to report trades to the NASD?
Yes, you are responsible for reporting trades through ACT. Pink Sheets offers a number of services that enables you to automate the reporting process. You can get FIX drop copies messages to integrate into your in-house systems, we can deliver drop copies to a third party such as Brass or we can submit drop copy executions directly to ACT on your behalf.

What is Rule 15c2-11?
Securities and Exchange Act of 1934 (Exchange Act) Rule 15c2-11 governs the submission and publication of quotations by brokers and dealers for certain non-Nasdaq over-the-counter equity securities. Specifically, the rule applies to a broker/dealer's initiation or resumption of quotations for such securities in any inter-dealer quotation medium, including the OTC Bulletin Board and the Pink Sheets. Pursuant to the rule, brokers and dealers are required to review and maintain specified information about the issuer of the security before publishing a quotation for that security. See complete text of Rule 15c2-11. Get a copy of the Form 211.

What is the piggy-back rule?
It means that a security is piggyback eligible under Rule 15c2-11. Market makers can quote the stock immediately without being required to file a Form 211.

Do I have to file a Form 211 for a New York Stock Exchange or American Stock Exchange delisted security?
Yes. Prior listing on NYSE or AMEX does not exempt a Market Maker from filing. However if the security was quoted on the Pink Sheets prior to the delisting, it may be already "piggyback" eligible.

The following interpretations of NASD Rules regarding Firmness of Quotations and Best Execution were provided by NASD Regulation in a letter to Pink Sheets dated April 28, 1999.

Do you post executions on the system?
No, the OTC Dealer does not post executions. For OTC equity securities, trades are reported to the NASD via the ACT system. In OTC bonds, there is no trade reporting facility, so no one sees a completed trade except you and your counter-party.

If I want to leave my desk for a little while and don't want to close my markets, is it possible to keep them firm?
Yes, you may temporarily exit the system without affecting your markets, however you are still liable under NASD Rules to trade at you published prices if your quotes are open.

What are the quoting requirements for the Pink Sheets?
You must be a registered broker/dealer with the NASD.

How do I withdraw from a Pink Sheet stock?
Users of the OTC Dealer can withdraw any quotes at any time using the "withdraw quote" command.

My quote has the best price, yet it does not show on the inside?
The Inside quote is calculated using only the quotes of traders who have opened their positions. Every trader has to open and close his/her markets every day.

What does the small "c" in front of the MMID mean?
It means that the trader has closed his/her markets and the quote is not considered firm. Closed quotes are not used to calculate the inside market.

Why don't I receive Inside Quote information for all OTCBB securities?
Only Pink Sheet and Yellow Sheet Market Maker quotes are displayed on the Dealer and OTC Quote. The OTC Dealer will integrate OTCBB quotes in the near future.

Are the priced quotes in the Electronic Quotation Service considered firm by NASD rules?
NASD Rule 3320 provides that no member shall make an offer to buy from or sell to any person any security at a stated price unless such member is prepared to purchase or sell, as the case may be, at such price and under such conditions as are stated at the time of such offer to buy or sell. IM-3320 provides further that

[m]embers and persons associated with members in the over-the-counter market make trading decisions and set prices for customers upon the basis of telephone and wire quotations as well as quotations in the National Quotation Bureau sheets. In some instances a dealer's quotations, purportedly firm, are, in fact, so qualified upon further inquiry as to constitute "backing away" by the quoting dealer. Further, dealers who place quotations in the sheets have been found to be unwilling to make firm bids or offers upon inquiry in such a way as to pose a question as to the validity of the quotations originally inserted. Such "backing away" from quotations disrupts the normal operation of the over-the-counter market.

Members, of course, change inter-dealer quotations constantly in the course of trading, but under normal circumstances where the member is making a "firm trading market" in any security, it is expected at least to buy or sell a normal unit of trading in the quoted stock at its then prevailing quotations unless clearly designated as not firm or firm for less than a normal unit of trading when supplied by the member. . . (emphasis added).

Accordingly, for purposes of compliance with NASD Rule 3320, unless designated as a non-firm quotation by the broker-dealer or by the rules of the quotation system, any priced order to purchase or sell a security would be considered a firm quote and the member would be expected to execute that order at its published quotation size.

If a trader's market changes, what amount of time is considered allowable before the trader updates his or her price?
Although the SEC firm quote rule, Rule 11AC1-1(c), does not apply to transactions in OTC eligible securities, its provisions and exceptions should be considered in providing guidance and responding to this question. SEC Rule 11Ac1-1(c) provides that a market maker must execute an order "presented" to it at a price at least as favorable as its published quotation up to its published quotation size. Exceptions to Rule 11Ac1-1 exist only if: (1) the market maker revises its quoted price or size prior to the order being presented; or (2) the market maker has effected or is in the process of effecting a transaction at the time an order is presented and immediately upon completion of that transaction communicates a revised quotation (the trade ahead exception). A trade-ahead exception for trades that are reported after the presentment of an order will not be permitted if a market maker executes a trade and changes its quote absent proof, such as the time of order entry, that the market maker was in the process of executing the order prior to presentment of the order and the market maker immediately updated its quote subsequent to the execution. These same concepts also apply to members' responsibilities under Rule 3320 with respect to quotes and transactions in OTC equity securities.

What would constitute "backing away" by dealers in the Electronic Pink Sheets?
Backing-away occurs when a member firm fails to execute an order "presented" to it at a price at least as favorable as its published quotation up to its published quotation size and no exception from the firm quote rule applies.

Will Rule 6750 apply for minimum sizes in OTC Equity Securities?
Yes. Rule 6750 provides that every member firm that functions as a market maker in OTC Equity Securities by entering firm quotations into the OTC Bulletin Board Service (OTCBB) (or any other inter-dealer quotation system that permits quotation updates on a real-time basis) must honor those quotations for the minimum size as defined by the rule. In this regard, it is the market maker's responsibility to determine the minimum size requirement applicable to its firm bid and/or offer in each of its registered securities (excluding OTC Equity Securities for which the OTCBB will not accept firm quotations).

Because the Electronic Pink Sheets is an inter-dealer quotation system that permits quotation updates on a real-time basis, the minimum quote size requirements would apply equally to securities quoted on that system.

If the Electronic Pink Sheets displays three active priced quotations, is a broker/dealer required to call the market makers to verify their quotations appearing on the Electronic Pink Sheets?
NASD Notice to Members 92-50, Question #41 provides that if the OTC Bulletin Board displays three firm quotations in a particular security, than a member does not have to call the market makers to verify their quotations appearing on the OTC Bulletin Board pursuant to Article III, Section 1 and 21 (b) of the NASD Rules of Fair Practice (currently NASD Conduct Rules 2320 and 3110). A broker/dealer need only note on the order ticket the identity of the broker/dealers and the firm quotations obtained from the OTC Bulletin Board. Because the Electronic Pink Sheets will be an inter-dealer quotation system that permits quotation updates on a real-time basis, the same reasoning should be applied so that a broker/dealer need only note on the order ticket the identity of the broker/dealers and the firm quotations obtained from the Electronic Pink Sheets.

If a security is quoted on the Electronic Pink Sheets and the OTC Bulletin Board, will a broker/dealer have to check both quotation sources to achieve best execution for the firm's customers?
Yes. Best execution requires that a firm make use of all technology reasonably available to it and when reliable, take into consideration superior priced orders that are resident in electronic systems that reasonably and readily accessible. Since both systems would be readily available to most broker/dealers, a broker-dealer should review the quotations on both quotation systems before executing a customer transaction.

If the broker/dealer has checked all available quotable sources, obtained three or more competing priced quotes, will the broker/dealer be able to rely on the best bid/offer in executing retail transactions?
Not necessarily. Best execution is a facts and circumstances analysis which involves more than just checking markets to determine the best bid and/or offer. The factors to be considered include, but are not limited to, speed of execution, volatility, relative liquidity, pressure on available communications, the size and type of the transaction, the number of primary markets checked and the location and accessibility of primary markets and quotation sources. Based on the above, executing transactions at the "inside" quotation reflected on the Electronic Pink Sheets would not necessarily mean the broker-dealer met its best execution obligations, just as is the case with transactions in securities quoted in the OTCBB.

The Web Team


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