Knopman Ch. 2 - The Nasdaq Stock Market

Dark pool

Type of alternative trading system (ATS) that does not disseminate its quotes to the public.

Qualified block positioner

A broker or dealer that buys and sells blocks of stock with a current market value of $200,000 from a single source to facilitate a sale of purchase by a customer.

Broker-dealer

A firm that trades securities for its own account or for the account of others. Many FINRA-registered firms are registered as broker-dealers b/c they can execute orders as a broker (agent) or dealer (principal).

NASDAQ

A global, publicly traded company that operates a variety of securities-related businesses, including the Nasdaq Stock Market, which is a registered national securities exchange. The broker-dealers tat wish to be market makers on the Nasdaq Stock Market must register Nasdaq members so they can use the Nasdaq Market Center trading system.

When is a market maker not obligated to trade a security at its quote?

A market maker is NOT obligated to honor a firm quote in two cases: 1. "Changing your quote"--Before a counterparty's order was presented, the market maker entered a revised bid or offer 2. "Executing your quote"--At the time the counterparty's order was presented, the market maker was in the process of eting a transaction and will be revising its quote.

Trade report

After trades are executed, certain information about the trade such as price and number of shares must be reported to the appropriate trade reporting facility. This info is then disseminated to the market at large.

Odd lot

An order that is for less than a normal unit of trading (ex: 12 shares)

Mixed lot

An order that is for more than a normal unit of trading but not a multiple thereof (ex: 286 shares)

Mark-down

What is the fee paid by a client when a firm buys from the client?

Mark-up

What is the fee paid by a client when a firm trades as a seller?

Two-sided quote

Both a bid and an ask for at least 100 shares of a stock during regular trading hours. Ex: MMAA is quoting 10.00-10.25, sometimes displayed as 10.00-.25. This means Market Maker A is willing to buy shares at $10.00 and is willing to sell shares at $10.25.

Promoter

Broadly defined to include anyone other than the issuer and its affiliates who many have an interest in influencing the member's market-making. NOTE: Promoters may not pay traders of market makers or provide them with any incentives in exchange for maintaining or publishing quotes.

ADF differences from Nasdaq

-Does NOT provide order routing or execution-- firms using the ADF must have their own electronic trading or execution systems to effect transactions. -Reports transactions in NMS securities for public dissemination -Executes trade comparisons (ex: trade reporting) -Delivers real-time data to FINRA for regulatory compliance and enforcement -The ADF operates from 8:00am-6:30pm, supporting pre-opening and after-hours trading.

Nasdaq Levels of Service

-Level 1 -Level 2 -Level 3

Quote and Order Access Requirement for ADF TC (Trading center)

-ADF Trading Center displays quotes on ADF --> Other ADF Trading Center must have Direct Electronic Access to the Quote, Non ADF Trading Center must have indirect Electronic Access •Direct Electronic Access: Ability to deliver an order for execution directly against quotes NBBO displayed by the ADF Trading Center's •Indirect Electronic Access: Ability to route an order through another FINRA member firm for execution against the member firm's NBBO -Similar cost as provided by exchanges -Auto update the quote and immediate respond for order execution -No discrimination -2 weeks notice if ADF TC wants to deny other TC's direct access -Record & Report to FINRA every order they receive 1.Unique Order Indentifier 2. Order entry form 3. Order Size 4. Order quantity 5. Symbol 6. Order price 7. Time in force 8. Order date 9. Order time (in milliseconds) 10. Minimal acceptable quantity 11. ADF trading center name, 12. Any other info requested by FINRA or the SEC -If responded to that order (Any response) it must record and submit this additional information: 1. Unique order identifier 2. Order response 3. Order response time 4.Quantity 5. Price -This info must be reported by 6:30PM to FINRA -Keep the record for 3 years (2 years maintained in easily accessible place) -Reporting & recording exception: NO RECORDING REQUIRED IF orders are received via National Exchange (NYSE or Nasdaq) or orders that are fully posted to an ADF trading center -Can use Reporting Agents to fulfill reporting obligation (Both party responsible)

NOTE FOR DIFFERENCE BETWEEN DESIGNATE PERCENTAGE AND DEFINED LIMIT

-Designated percentage regulate entry of new quotes -Defined limit regulates when existing, already-entered quotes must be updated

Quotation Requirements (same as NASDAQ)

-Maintain firm two-sided quote on continuous basis for at least 1 round lot -Minimum quotation increment of $0.01 for price over $1.00 and $0.0001 for price under $1.00. -Designated percentage and defined limit with the inside market/NBBO -Trade or Fade (When MM has option to fade) ......MM's Current quote is executed against new market sell order (larger in size than MM's bid size). Shares not fulley executed yet. But MM is NOT obligated to execute, instead, must enter new quote with inferior price. Ex of fade: An ADF MM is bidding $10.00 for three round lots. It's presented a market order seeking to sell five round lots. The MM is only obligated to buy three round lots b/c that is its bid size. However, if it does not purchase all five round lots being sold, it must update its bid to a price less than the $10.00 after execution.

Inactive quoting

-Must quote at least one marketable quote or two-sided quote every 30 calendar days -Failure to do so leads to having to get recertified by FINRA

FINRA Member registration additional requirements:

-Receive certification of good standing from FINRA -Comply with net capital requirements and other financial responsibilities -Submit an ADF deposit of $250,000 in five equal installments into escrow. This amount increases to $500,000 if the firm requests accelerated migration to the ADF. A firm that registers as an ADF MM must plan to direct at least 75% of its quoting and trading volume to the ADF. Failure to do so can result in the forfeit of some or all of the firm's deposit.

Unexcused (Voluntary) Withdrawal

-Withdraw quote and not re-enter for 5 minutes -Not re-enter within 30 minutes after trading halt -Withdrawn MM can't re-register for that security for 20 business days -Exception: Terminate quoting because clearing arrangement failed, can then re-register right away when problems are solved. -3 UNEXCUSED System Outage over 5 days period will suspend MM. MM can re-register after 20 business days. ..........Can be excused if written request to FINRA is approved, but should be sent by the close of that business day the outage happens. A system outage is an inability to post quotes or automatically respond to offers.

Nasdaq Market Maker Requirements

1. Market maker applies on Nasdaq to initiate quotes in the specific security 2. Nasdaq generally approves request on the same day, at which point the market maker may begin entering quotes. 3. The market maker must begin quoting the security by no later than the open of trading five business days later.

Round lot

100 shares

Opening Cross Timeline

4:00am - The Nasdaq system opens and order entry begins, including limit-on-open (LOO), market-on-open (MOO), and opening-imbalance-only (OIO) orders. 9:28am - Nasdaq disseminates opening cross order imbalance information every five seconds between 9:28 and 9:30am. Market participants may seek to balance the imbalance with OIO orders. 9:30am - The opening cross occurs and trading begins.

KNOPMAN NOTE: The Number of days a marker maker can be excused are as follows:

5 days - Due to equipment malfunction, vacation, religious holidays 60 days - For legal or regulatory reasons -No specific time limit, if engaged in investment banking activities

Market Maker

A FINRA memner firm, such as a broker-dealer, that holds itself out as willing to buy or sell a particular security at publicly quoted prices. Market makers include broker-dealers that trade for their own (proprietary) accounts or for the accounts of their customers (retail or institutional) ***** NOTE: A market maker me willing to hold itself out to buy and sell securities on a continuous basis. MEMORIZE THIS DEFINITION

Accidental Withdrawal

A MM that accidentally removes itself from a stock can apply for relief from Nasdaq. Accidental withdrawals can happen from something as simple as a keystroke error.

Voluntary Termination

A nasdaq market maker may voluntarily terminate registration by withdrawing its two-sided quote from the Nasdaq Market Center. Once registration is terminated, a market maker cannot re-register as a market maker in that same security for 20 business days. If a two-sided quote for a security is voluntarily withdrawn for reasons beyond the market maker's control, it is not considered a termination of registration. These include: -A corporate action related to a divdend, payment, or distribution -A trade halt in the security In these cases, registration will not be terminated if the market maker: -Enters a new two-sided quote before the market closes on the same day -Enters two-sided quote the day when trading resumes, after a halt -Enters a new two-sided quote on the next regular trading day after the day on which the market maker is eligible to enter a two-sided quote, provided the MM requests to begin quoting during the next regular market session and Nasdaq approves the request. A voluntary withdrawal from a two-sided quote in one security does not affect any other securities in which the same member makes a market.

Trading as a Riskless Principal

A riskless principal trade is one where a member, having received an order to buy, purchases the security as principal and then fills the existing customer order at the same price. It would also be a riskless principal trade in the opposite scenario, where the member sells in the market having already received a sell order from a customer. The trade is considered riskless because the market maker buys the stock while already having an order in hand to immediately liquidate.

Excused withdrawal

ALL ADF MMs are available for vacation excuse where as on Nasdaq it is only available to small MMs

Excused Withdrawal

Allows a MM to seek an excused withdrawal by contacting Nasdaq MarketWatch prior to withdrawing its quote. Excused withdrawal status may be granted for up to five business days should circumstances require it. Circumstances under which an excused withdrawal will be granted include: -Religious holidays, provided the application is received at least one business day in advance -Vacation, for firms with three or fewer Nasdaq terminals, provided that the application is received at least one business day in advance and includes a list of securities from which the firm plans to withdraw Excused withdrawals may also be granted for firms that are market makers and engage in investment banking activities such as: -Possessing news regarding a merger or other insider information -Underwriting activities under Regulation M NOTE: A MM that comes into possession of inside information should seek an excused withdrawal due to legal requirements (to avoid trading on the basis of inside information). The MM may be able to engage in passive market making.

ADF

Alternative Display Facility: a quotation and trade reporting facility. Similar to nasdaq but has some key differences.

ADF Trading center

An ADF market participant or a Registered Reporting ADF ECN.

Exchange

An SEC-registered entity that provides a marketplace (physical or electronic) where securities may be bought and sold. An exchange is a type of market center. Examples of SEC-registered exchanges include: -The Nasdaq Stock Market LLC -Nasdaq OMX BX, Inc. (formerly the Boston Stock Exchange) -Nasdaq OMX PHLX, Inc. (formerly the Philadelphia Stock Exchange) -New York Stock Exchange LLC -Chicago Stock Exchange, Inc. -International Securities Exchange, LLC -Miami International Securities Exchange, LLC

Bank

An institution organized under the US banking laws-- a federal savings association, or a member of the Federal Reserve System

Order

An instruction to buy or sell a security. Orders can include many different types of additional instructions, such as acceptable prices (limit orders), timing, markets to route the order to (directed orders), and even whether to publicly display the order to the market at large (displayed orders).

System order

An order entered into the system for display and available for execution as appropriate. All displayed orders on Nasdaq must be limit orders. That is, they must specify a price. System orders can be designated in a variety of ways:

Market participant

Any party that is accessing, trading, buying and selling equity securities. This broad term can include market makers, institutional traders, and retail investors.

Clearing agent

Any person acting as an intermediary facilitating securities transactions. This can include handling payment for or deliveries of securities, providing settlement services, or acting as a custodian of securities. Broker-dealers, life insurance companies, and mutual funds are not considered clearing agencies when their activities are confined to their own accounts.

Transfer agent

Any person who registers the transfer or exchange of securities, or converts securities. Additionally, a registrar monitors securities to prevent unauthorized issuance.

Broker

Any person who, in the regular course of business, engages in securities transactions for its own account, making the firm a party to the trade.

Terminating Quotes

As discussed, market makers have an obligation to make continuous firm, two-sided quotes. The circumstances under which market makers may stop quoting a security are subject to both FINRA and Nasdaq regulations.

apply to FINA by submitting two documents:

Certification Record - Certifies the ability to comply with regulation NMS Participant agreement - to submit quotes and trades to ADF. The agreement generally must be submitted at least six months before the member expects to begin participating in ADF.

Tier 2 Securities = 28%

Consisting of NMS stocks that are not Tier 1 with a price equal to or greater than $1.00

Tier 3 Securities = 30%

Consisting of NMs stocks that are not Tier 1 with a price of less than $1.00

Opening Cross

Determines opening price for each individual stock. Helps prevent large price movements at market open.

Prohibition from locking or crossing quotes

During normal market hours, MMs are prohibited from entering any quotes that would lock or cross the market. (Quoting! not actually executing without client order)

MPIDs - Market Participant Identifiers

Each market maker's is displayed with a unique identifying market participant identifier. This MPID is a four-letter code assigned by FINRA to identify a member and enforce quote and pricing obligations. Each market maker will have a primary MPID, though firms can obtain additional MPIDs to display additional quotes or orders in the system.

NOOP - Nasdaq Official Opening Price

Each morning at market open, Nasdaq will publish the NOOP.

Minimum Quote Increments

Minimum increments for NMS stocks including those quoted on Nasdaw are: -$0.01 (one cent) for quotes of $1.00 or above -$0.0001 (one hundredth of a cent) for quotes below $1.00

Order access

Ensuring fair and non-discriminatory access to all quotations in all markets

Execution

Execution occurs when two parties agree (often electronically) to trade at a set price.

ADF ECN

FINRA member that operates an Electronic Trading Network and has been approved for ADF trading.

ADF Market participant

FINRA memebr that has been approved for ADF trading. They are a registered reporting ADF Market Maker.

backing away

Failure to maintain or honor firm quotes

Pricing Obligations for Existing quotes--Defined limit

For quotes already existing in the market, new quotes have to abide by the designated % in relation to the NBBO while existing quotes have a slightly looser of a 'defined limit' % to adjust their quotes to when the NBBO forces market makers to make a change to theirs bids and offers.

FINRA Members

Must register as ADF market participants (or an ADF ECN) before making a market or displaying orders on ADF. To register, a member must do all of the following:

Knopman Note: Here is a summary of the types of crossing orders and an example of each:

If a MM wants to buy shares at the opening price and ensure that it receives a particular price or better, the MM should enter a limit-on-open (LOO) order. Ex: Buy LOO $28.00 means that if the market open at $28.00 or less, the order will be filled. If the market opens above $28.00, the order will not be filled. If a MM wants to buy shares at the open whatever the opening price, the MM should enter a market-on-open (MOO) order. Ex: A buy MOO order will be executed at the opening price, whatever that may be ($22, $28, $34, etc.). A MOO guarantees execution at the open, but offers no guarantee as to price. An Imbalance Only order (IO) is a priced order to be executed at the opening or closing price. An IO order's price will bested as the cross occurs, subject to the price instruction. Ex: If an IO buy order is entered with a price of $21.00, and the highest bid is $20.95, the IO order is repriced to $20.95. If the highest bid drops further, to $20.89, the IO order will be repriced again so it can be executed at the best bid. If, however, the highest bid moves to $21.15, the IO order will not be repriced above the $21.00 price instruction and will not execute in the cross.

Customer Limit Order Handling & Displaying

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.

What is the market maker is quoting more than one type of security (ex: equity and warrants) for the same issuer on Nasdaq? How do these rules apply?

If a market maker is quoting both equity and warrants on a particular issuer, theket maker is required to trade a normal trading unit for both securities: the equity and the warrants.

Tier 1 Securities = 8%

Includes S&P 500 or Russell 100 stocks and some exchange-traded products (ETPs). This universe consists of approximately 1000 large-cap stocks.

Limit-on-Close order (LOC)

Limit order to buy or sell shares at the market close only if the closing price is better than the order's limit price (lower than limit bid or higher than limit ask) Cannot be entered, modified or cancelled after 3:50pm.

Limit-on-Open order (LOO)

Limit order to buy or sell shares at the market open only if the price meets the limit condition. This only remains placed during the market open and does not last the whole day if it is not filled. Cannot be entered or cancelled after 9:28am.

Executing Transactions

Market makers have a number of different ways to execute trades. The ways in which a market maker can trade include: -Principal -Agent -Riskless principal

two-sided obligation

Market makers must be willing to buy and sell on a continuous basis during all regular market hours. The two sides being the bid and the offer.

Level 2 Service

Nasdaq Level 2 provides all the data provided in level 1 (current prices and last transaction information), plus market participant depth in Nasdaq, NYSE, and regional exchange-listed securities.

Level 1 Service

Nasdaq level 1 service, also called Nasdaq Basic, provides information on the best bids and offers on all US exchange-listed securities traded on Nasdaq. Thus, an investor can see the current best prices on a security. Level 1 service also provides information regarding the last sale (last match) for each security as reported to the FINRA/Nasdaq Trade Reporting Facility. Level 1 service is appropriate for retail investors or financial professionals not directly executing trades or requiring detailed market data, as it providess a limited view of the market.

Entry of orders

Nasdaq market makers and Nasdaw ECNs (Electronic Communication Network) can enter quotes into the Nasdaq system from 4am-8pm (Eastern). Quotes will be processed based on the specific instructions and criteria that the Nasdaq market maker or Nasdaq ECN assign it when they enter their quotes.

NASDAQ Cancellation of Orders and Error Account

Nasdaq may cancel orders it deems necessary to maintain fair and orderly markets if a technical or system issue occurs at Nasdaq or a routing destination. Nasdaq will provide notice of the cancellation to affected members as soon as practicable. Nasdaq also maintains an error account for the purpose of addressing positions that result from a technical or system issue at Nasdaq, a routing destination, or a non-affiliate third party routing broker. Ex: An order is entered to buy 350 shares of XYZ stock. Due to a Nasdaq technical error, the order is executed for 400 shares. Since the customer only wants 350, Nasdaq will hold the extra 50 shares in its error account.

Reserve orders

Nasdaq offers a reserve feature that allows participants to display part of the full size of an order while holding the rest of the order as undisplayed (in reserve). The reserve size is vailable for execution but is not displayed on the Nasdaq.

NBBO

National best bid/offer or the inside market. This is the best two bid and ask quotes at any moment.

Can a market maker execute and report one trade using different MPIDs?

No. A market maker must report a trade using the same MPID that was used to execute it. For example, a market maker has a primary MPID (MMAA) and an additional MPID (MMAAB), if the firm executes a trade using the additional MPID, it must report the trade using the same MPID (MMAAB).

Are the quotation requirements for a supplemental and primary MPID the same?

No. Supplemental MPID quotes do not need to be two-sided and can be withdrawn at any time, while the primary MPID must always have a firm, two-sided quote.

Order protection

Obtaining the best price for customer order execution

NOTE:

On the nasdaq system, allowable order sizes are between 1 and 999,999 shares. Odd-lot orders (fewer than 100 shares) are allowed, but fractional shares are not.

Payments for Market-Making

Payments are prohibited for maintaining quotes or publishing a specific quote, as well as for market-making activities. Although issuers of thinly traded securities may have a legitimate business reason for wanting market makers to continue publishing quotes, they cannot pay a market maker any type of compensation, directly or indirectly, to do so. If they do, the market maker violates the rule by accepting the payment.

Maloney Act of 1938

Permitted SROs (Self-regulatory organizations) to supervise and regulate broker-dealers operating in the secondary market.

Closing-Imbalance-Only order (CIO)

Provides liquidity intended to offset on-close orders during the closing cross. Can be entered from 4:00am til the closing cross at 4:00pm. Can be cancelled from 3:50pm-3:55pm for legitimate order enter error. Cannot be cancelled or modified after 3:55pm except to increase the number of shares.

Opening Imbalance Only (OIO)

Provides liquidity intended to offset on-open orders during the opening cross. (4:00am-9:30am) Cannot be cancelled or modified after 9:28am except to increase the number of shares.

Market data

Publicly disseminating quote and pricing information

2 Phases of a halt cross

Quote only - A MM can accept and enter customer quotes and orders, but no execution. Nasdaq accepts quotes and order entry and also allows orders to be cancelled, but no execution will go through. Usually lasts 5 minutes unless an additional one minute extension is triggered due to high volatility which is considered a price movement of 50 cents or 10%, whichever is greater. Trading resumption - After the halt cross sets the re-opening price, orders execute and regular trading begins. Bulk orders of paired trades (buys and sells) are matched for execution at this indicative clearing price. This is the price at which the most orders would be executed.

Bona fide

Real or actual

Liquidity

Refers to the ease with which stock can be converted to cash, or put another way, how quickly it can be sold. When there are more participants in the markets, there is greater liquidity and tighter bid-ask spreads.

Bid-Ask (size x size)

Refers to the publicly displayed quotes that market makers post for securities in which they make a market. The bid refers to the price at which a market maker stands ready to buy shares from sellers. The ask (offer) refers to the price at which a market maker stands ready to sell securities to a willing buyer. Thus a market maker is 9.00-10.00 1x3 willing to buy shares at $9.00 and is willing to do so for one round lot, and will sell shares at $10.00 and willing to do so for three round lots.

Regulation NMS Overview

Reg NMS is a series of initiatives designed to modernize and strengthen the National Market System (NMS) for equity securities. It's important to note that these rules only apply to NMS stocks, which are defined as equities that are listed or traded on a public exchange, such as NYSE or Nasdaq. These rules address the following terms:

Securities Exchange Act of 1934

Regulates the purchase, sale, and exchange of securities in the capital markets. Established the rules and requirements for over-the-counter transactions in the secondary markets.

Market-on-Close order (MOC)

Requests execution at the closing price. Cannot be entered or cancelled after 3:50pm.

Market-on-Open Order (MOO)

Requests execution at the opening price. Cannot be canceled, or modified after 9:28am. May be entered between 4:00am and immediately prior to 9:28am.

Level 3 Service

Required for all market makers. Allows a market maker to adjust its quotes in the system, providing the mechanism to change quotes as investors change their view of a particular security. Thus, the quotes that are displayed on Level 1, Level 2, and TotalView are entered and modified by market maker firms that have subscribed to Level 3 service. Like TotalView, Level 3 allows firms to see the entire depth of the market.

FINRA - Financial Industry Regulatory Authority

Serves as the industry's primary SRO.

Nasdaq Crossing Process (Net Order Imbalance Indicator (NOII) )

Sets opening and closing prices. Allows market participants to view order imbalances prior to the Opena and close. Can enter offsetting orders to buy and sell shares. More buyers makes it a seller's market and vice versa.

Pricing increments

Setting the permissible pricing increments for quotes

Market participant depth

Shows the best quote of each market participant in the Nasdaq execution system (not just the higher bid and lowest ask). This type of data can be used by market participants to gauge supply, demand, and potential market movements as a result of liquidity or lack thereof.

Nasdaq Closing Cross

Similar to the opening cross, but occurs at the market close each day. The closing cross will resolve and address the order imbalances that have arisen during the day, resulting in a fair and transparent closing price. Sets the NOCP (Nasdaq Official Closing Price).

Book Processing

The nasdaq system will execute orders in a specific order: First, orders are executed based on price priority (higher bids go before lower bids, lower asks go before higher asks). For orders that are equal in price, earlier orders will receive execution first (time priority) The priority of order types is as follows: 1. Displayed orders 2. Non-displayed orders 3. The discretionary portion of discretionary orders In other words, at a particular price all displayed orders will be filled earliest to latest. Once all displayed orders are gone, the system will execute non-displayed orders earliest to latest, and once these are exhausted, all discretionary orders, earliest to latest.

Tier 1 Securities % Exceptions

The pricing obligations change during the market open period (9:30am-9:45am) and market close period(3:35pm-4:00pm). During these periods, the designated percentge for Tier 1 securities is increased to 20% allowing firms to enter quotes further away from the NBBO, as there is often greater volatility and price movement at these times. To Summarize: The designated %'s set the limit for how low bids may go and how high offer may go. They do not preclude market makers from quoting prices that are closer to the NBBO than the specified levels.

Pricing Obligations for New Quotes--Designated Percentage

The quotes market makers enter for NMS stocks during regualr trading hours must meet certain pricing guidelines. All quotes must be within a designated percentage away from the current NBBO (national best bid/offer). If there is no NBBO, the pricing obligation references the last reported sale. The idea is that market makers must enter quotes that are reasonably related to the security's market value. The %'s are as follows:

Non-attributable orders

These are anonymous. Rather than being displayed on Nasdaq under the market maker's MPID, non-attributable orders are indicated with MPID "NSDQ." Market participants do not know the identity of the buyer or seller, just the price and size of the quote. NOTE: A firm wishing to display attributable quote will use its assigned primary or supplemental MPID. A firm wishing to display a Non-attributable quote will use the MPID "NSDQ".

Non-displayed orders

These quotes are available for execution but are not displayed in the system. Non-displayed orders interact identically as displayed orders but receive a lower priority and are visible to other market participants.

Tiers for Defined Limit of existing quotes

Tier 1 securities: 9.5% --> At the market open and close periods, this is increased to 21.5%. (Stocks in the S&P500 and Russell 1000 index) Tier 2 securities: 29.5% (stocks not tier 1 with a price greater than or equal to $1.00) Tier 3 securities: 31.5% (stocks not tier 1 with a price less than $1.00) 31.5% for rights and warrants In all cases, the defined limit is an additional 1.5% cushion. Memorize the designated %'s at: 8% (20% @ market open/close) 28% 30% 30% and then add 1.5% to find out the defined limit.

Trading as Principal

When a market maker trades out of its own inventory, it is said to be acting in a principal or dealer capacity. In this scenario, the market maker is one of the counter parties to the transaction. EX: A customer contacts a market maker to buy 1000 shares of MSFT. The market maker executes the trade by selling the customer 1000 shares of MSFT stock that it owns.

crossed market

When the inside bid is higher than the inside offer. This will execute at the bid, creating price movement.

Market center

a location where securities orders can be executed. Market centers include registered exchanges--such as the NYSE and Nasdaq--and non-exchange trading venues such as electronic communication networks (ECNs), other market makers, where orders can be filled.

Normal trading unit

a minimum of 100 shares on both the bid and ask sides - this 100 share unit is referred to as a round lot

Trading as Agent

although market makers are required to provide liquidity from their own accounts, to the extent that they have customer interest on the other side of the market, they can execute a trade in an agent (or broker) capacity. Ex: Joe contacts a broker-dealer Z to buy 300 shares of IBM stock. Jane contacts broker-dealer Z to sell 300 shares of IBM that she currently owns. The broker-dealer will connect Joe and Jane-- the two counter parties to the trade. When acting as an agent, each client will pay the broker-dealer a commission.

Market order

an order to execute immediately against the best available price. A market order to sell will execute against the best bid, thereby guaranteeing execution.

halt cross

determines the price when a halted security is re-opened or the re-open price. Similar to an opening cross by its attempt to increase transparency with timely information to investors on imbalances prior to the resumption of trading. Allows all investors to enter orders and participate in price discovery during a halt.

Attributable order

indicates the MPID of the market maker placing the order next to its quote

Under Regulatory NMS (National Market Systems) Rule 602:

market makers are expected to buy or sell a normal trading unit in a quoted stock at its quoted price

Order size

refers to the number of shares associated with a quote or an order. The normal unit of trading (a round lot) is 100 shares.

Taker of liquidity

the party that cross the spread to execute the an order against an existing quote. The rule rewards parties that come into the market to execute orders. Ex: DEF stock is quoted .75-.78 18x14. A customer subsequently enters an order to sell 800 shares at .72. In this case, the order would execute at the best bid of .75. Even though the customer was willing to sell for a lower price, he or she gets the price improvement because he or she is the taker of liquidity.

locked market

when the inside bid (highest bid) and the inside offer (lowest asked price) are the same. This will execute the order at this price.