Market Making and Quoting Activities
Quick Answer
A registered market maker must maintain two-sided continuous quotations in each security in which it is registered, priced within a Designated Percentage of the National Best Bid/Offer (NBBO) to prevent stub quotes. Market makers may withdraw quotes only with an excused absence; an unexcused withdrawal triggers a 20-business-day suspension. During a Reg M restricted period, a market maker that is also an underwriter may continue quoting only as a passive market maker. The payments-for-market-making prohibition is a bright-line ban on issuers paying broker-dealers to make markets, with limited exceptions for registered-offering compensation and reimbursement of regulatory fees.
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 triggers a 20-business-day suspension from market making in that security. |
| 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 suspension is a significant penalty: a firm that walks away from making a market without a documented excused-absence reason cannot re-register in that security for nearly a month.
Exam Tip: Gotchas
- An unexcused withdrawal triggers a 20-business-day suspension, not a fine. The penalty is regulatory exclusion, not a monetary sanction. The market maker cannot resume quoting that security for 20 business days.
- 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" is an executable order; the market maker must trade at the quoted price in at least the minimum size required. A market maker who refuses to trade at its quoted price is backing away (a fair-offers violation, covered separately).
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 lesser of 30% of average daily trading volume (ADTV) or two times the minimum quotation size (200 shares for most securities)
- Must withdraw once the cap is hit for the day
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 lesser of 30% ADTV or 200 share lots. 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)
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.