Quick Answer
Market makers maintain meaningful two-sided continuous quotes. Nasdaq voluntary termination generally bars re-registration in that security for 20 business days; unexcused quote withdrawal is a separate violation. Reg M permits qualifying passive market making within price and purchase limits. Issuer payments for market making are prohibited unless a specific exception applies.
A market maker provides liquidity to the market by simultaneously posting a bid (price to buy) and an offer (price to sell), profiting from the spread. The Series 24 exam tests the supervisory framework around this activity: who can be a market maker, what quoting standards apply, how withdrawal of quotes is policed, what restrictions apply during a securities offering, and what payments are prohibited.
Market Maker Registration and Quoting Obligations
| Requirement | Description |
|---|---|
| Nasdaq Market Center registration | Nasdaq participant registration and access. A firm must register with Nasdaq before it can quote or trade through the Nasdaq Market Center. |
| Security-by-security registration | Registration as a Nasdaq Market Maker in a specific security. A firm registers security-by-security and must maintain that registration to continue quoting in that security. |
| Two-sided continuous quotations | Market makers must enter and maintain two-sided quotations in each security in which registered; quotes must be priced within the Designated Percentage of the NBBO (this is the standard that targets stub quotes). |
| Normal business hours | Defined as 9:30 a.m. to 4:00 p.m. ET. Market makers must quote during all of normal business hours unless excused. |
A "two-sided quotation" means the market maker simultaneously posts a bid AND an offer. A "continuous quotation" means the market maker maintains those quotes throughout normal business hours, not intermittently.
Designated Percentage and Stub Quotes
A "stub quote" is a quote so far away from the inside market that it has no real economic purpose: for example, a $0.01 bid and a $99,999 offer on a stock trading near $100. The 2010 Flash Crash highlighted that stub quotes could be hit accidentally during volatility, causing extreme price dislocations.
The Designated Percentage band requires that market-maker quotes be priced within a tier-specific percentage tied to the NBBO so that a quote is reasonably related to the inside market. Two-sided does NOT mean any price on each side; it means a meaningful, executable two-sided market.
Exam Tip: Gotchas
- A "two-sided quotation" must be priced within the Designated Percentage of the NBBO. A $0.01 bid / $99,999 offer is technically two-sided but violates the quotation standard because it is not reasonably related to the inside market.
- Market makers must quote continuously during normal business hours (9:30 a.m. - 4:00 p.m. ET). Intermittent quoting violates the continuous-quotation requirement even if the market maker is technically registered.
Withdrawal of Quotations
A market maker may not unilaterally stop quoting. Withdrawal triggers depend on whether the absence is excused.
| Subject | Requirement |
|---|---|
| Excused absence (Nasdaq market makers) | Withdrawal of quotes is permitted only with an excused absence for legitimate reasons (equipment failure, religious holiday, illness). An unexcused withdrawal is a rule violation and can lead to the firm's registration in that security being terminated. |
| Voluntary termination of registration | A market maker that voluntarily terminates its registration in a security may not re-register in that security for 20 business days. |
| ADF quote withdrawal | Withdrawal of Alternative Display Facility (ADF) quotations follows parallel excused-absence requirements. |
| OTC equity withdrawal during distribution | Withdrawal of OTC equity quotations during a Reg M distribution is governed separately. A market maker that is also an underwriter must withdraw or move to passive market making during the restricted period. |
The 20-business-day re-registration bar is a significant deterrent: a market maker that voluntarily terminates its registration in a security cannot re-register in it for nearly a month. The bar attaches to the termination of registration, not to a quote withdrawal on its own.
Exam Tip: Gotchas
- The 20-business-day bar attaches to VOLUNTARY TERMINATION of registration, not to a quote withdrawal by itself. A market maker that terminates its registration in a security cannot re-register in it for 20 business days. An unexcused quote withdrawal is a separate violation of the excused-absence rule.
- Equipment failure is a legitimate excused absence; trading losses are not. A market maker who walks away because the position is losing money has not made a legitimate withdrawal.
Character of Quotations and Minimum Quote Size
ADF and OTC equity quoting carries additional requirements:
| Subject | Requirement |
|---|---|
| ADF firm and continuous quotes | Alternative Display Facility (ADF) market-maker quotes must be firm (executable) and continuous during normal business hours. |
| ADF normal business hours | Defined parallel to Nasdaq's 9:30 a.m.-4:00 p.m. ET window. |
| Minimum quote size for OTC equities | Sets the minimum quote size for OTC equity securities, tiered by price (e.g., 1 share for very high-priced stocks, up to 10,000 shares for low-priced stocks). |
A firm quotation generally obligates the quoting firm to execute at its published price up to its published size, subject to the rule's exceptions. Minimum quotation size determines how much must be displayed; it does not reduce a larger displayed quote's execution obligation. An unjustified refusal is backing away.
Passive Market Making Under Reg M
When a Nasdaq stock is in distribution (a registered offering or a private placement that triggers Reg M), an underwriter that is also a market maker faces a conflict: continued aggressive quoting could artificially support the offering price. Regulation M addresses this by allowing passive market making during the restricted period.
A passive market maker:
- May not exceed the highest independent bid (cannot lead the market up)
- Has net daily purchases capped at the greater of 30% of average daily trading volume (ADTV) or 200 shares
- May complete a single order that reaches or exceeds the limit, then must promptly withdraw its quotations and refrain from further bids or purchases that day unless another Reg M exception permits them
The cap resets each trading day. A passive market maker cannot accumulate inventory aggressively to stabilize the new-issue price.
Think of it this way: Passive market making lets an underwriter keep providing liquidity without artificially propping up the issue. The market maker is allowed to be present at the bid but is forbidden to lead it higher or buy heavily. The 30% ADTV cap prevents the market maker from absorbing material supply at the offering price.
Exam Tip: Gotchas
- A passive market maker may match the highest independent bid but may not exceed it. Matching is permitted; leading the market up is prohibited.
- The daily purchase cap is the greater of 30% ADTV or 200 shares. For an illiquid stock with low ADTV, the 200-share floor governs; for a liquid stock, the 30% ADTV cap governs.
Payments for Market Making (the Payments-for-Market-Making Prohibition)
The FINRA payments-for-market-making prohibition is one of the bright-line rules of the Series 24 exam: a member firm may NOT accept any payment, directly or indirectly, from an issuer (or a promoter or affiliate) for:
- Publishing a quotation
- Acting as a market maker in the issuer's security
- Submitting an application in connection with such activities
The prohibition extends to payment of any kind: cash, securities, warrants, free office space, future banking mandates, or any other consideration of value. The purpose is to prevent issuers from buying favorable visibility.
Permitted exceptions are narrow:
- Compensation paid in connection with a bona fide registered offering (underwriting / placement fees)
- Reimbursement of registration fees imposed by SROs or the SEC
- Payment for bona fide non-market-making services (e.g., research consulting unrelated to quoting)
- A payment a national securities exchange's own rules expressly permit (a fee arrangement the exchange has put through the SEC rule-filing process)
Think of it this way: The prohibition cuts off the conflict at the source. If an issuer could pay a market maker to post quotes, investors would never know whether a quote reflected supply and demand or was rented by the issuer. The rule treats the conflict as too dangerous to manage through disclosure.
Exam Tip: Gotchas
- The prohibition is bright-line: an issuer cannot pay a firm to make a market in its stock. Payment in any form (cash, warrants, in-kind compensation) is prohibited.
- Underwriting compensation in a registered offering is the permitted exception, not the rule. The exam tests fact patterns where the payment is labeled "for market making" but the firm is also the underwriter; the question is whether the payment is genuinely for the underwriting role.
- The prohibition covers payments from promoters and affiliates, not just the issuer. A payment from the issuer's IR firm or a controlling shareholder is equally prohibited.
What Should You Check on Exam Day?
- Can you state what the Designated Percentage band prevents (stub quotes) and why a $0.01 bid, $99,999 offer fails the standard?
- Do you know the 20-business-day bar on re-registering after voluntary termination, and that it differs from an unexcused quote withdrawal?
- Can you state the passive market maker's daily purchase cap: the greater of 30% of average daily trading volume or 200 shares?
- Do you know the payments-for-market-making prohibition bars issuer payments for quoting, except for bona fide registered-offering compensation?