Character of Quotations on the Alternative Display Facility

The character of quotations rule is the facility's own quoting rulebook. It opens on a standard of conduct: a member registered as a registered reporting market maker on the Alternative Display Facility (ADF) shall engage in a course of dealings for its own account to assist in maintaining, insofar as reasonably practicable, fair and orderly markets in accordance with that rule.

What Is the Two-Sided Obligation?

For each ADF-eligible security in which a member is a registered reporting ADF market maker, the member shall be willing to buy and sell that security for its own account, on a continuous basis during regular market hours, and shall enter and maintain a two-sided trading interest. The rule names that duty the Two-Sided Obligation.

The obligation is subject to the procedures for excused withdrawal in the withdrawal of quotations rule, which is covered in the unit on achieving market making status.

Exam Tip: Gotchas

• The duty attaches security by security, not firm-wide. A member carries the Two-Sided Obligation only in the ADF-eligible securities in which it is a registered reporting ADF market maker.
• An excused withdrawal is the sanctioned way out, and it comes from a different rule. The two-sided duty itself contains no self-help exception; the withdrawal rule's excused-withdrawal procedures are what relieve it.

What Size Must the Two-Sided Interest Display?

Interest eligible to count toward the Two-Sided Obligation shall have a displayed quotation size of at least one normal unit of trading, or a larger multiple of it.

Provided, however, that a registered reporting ADF market maker may augment its Two-Sided Obligation size to display limit orders priced at the same price as the Two-Sided Obligation.

A normal unit of trading for a national market system (NMS) stock is the round lot assigned to that stock under the Regulation NMS definitions. That delegation is set out in the lesson on offers at stated prices.

What Must a Market Maker Do After an Execution Against That Interest?

After an execution against its Two-Sided Obligation, a registered reporting ADF market maker must ensure that additional trading interest exists to satisfy that obligation. The rule gives two ways to do it, joined by "either" and "or":

• Immediately entering new interest to comply with the obligation to maintain continuous two-sided quotations; or
• Identifying existing interest on the ADF that will satisfy the obligation.

Exam Tip: Gotchas

• Replenishment does not always mean entering something new. Pointing to interest already resting on the facility satisfies the rule, so an answer that requires a fresh quotation after every execution is too narrow.

When Do the Pricing Obligations Start and Stop?

A registered reporting ADF market maker shall adhere to the rule's pricing obligations during the trading day, with two provisos:

• They shall not commence during any trading day until after the first regular way transaction on the primary listing market in the security, as reported by the responsible single plan processor.
• They shall be suspended during a trading halt, suspension, or pause, and shall not recommence until after the first regular way transaction in the primary listing market in the security following that halt, suspension or pause, again as reported by the responsible single plan processor, except as permitted under the Limit Up-Limit Down Plan.

Exam Tip: Gotchas

• The restart is a trade, not a clock. Pricing obligations come back after the first regular way transaction prints on the primary listing market, except as the Limit Up-Limit Down Plan permits, so the end of the halt by itself does not restart them.
• The same trade test governs the open. On an ordinary trading day the obligations do not begin until that first regular way transaction, which is why a pre-open quotation is not measured against the bands.

How Far From the Inside May the Two-Sided Interest Be Priced?

At the time of entry of bid interest satisfying the Two-Sided Obligation, the price of that bid interest shall be not more than the Designated Percentage away from the then current National Best Bid, or, if there is no National Best Bid, not more than the Designated Percentage away from the last reported sale from the responsible single plan processor.

Offer interest works the same way against the National Best Offer, or, if there is no National Best Offer, the last reported sale from that processor.

Re-entry is triggered in two ways for each side. Where the reference price increases to a level that would cause the interest to be more than the Defined Limit away from it, or where the bid is executed or cancelled, the market maker shall either:

• Enter new interest at a price not more than the Designated Percentage away from the then current reference price; or
• Identify to FINRA current resting interest that satisfies the Two-Sided Obligation.

Nothing in the rule precludes a registered reporting ADF market maker from quoting at price levels closer to the National Best Bid and Offer than the levels the rule requires.

Exam Tip: Gotchas

• The re-entry test uses a wider number and has a second trigger. Interest is entered inside the Designated Percentage, and it has to be replaced when the reference price moves it more than the wider Defined Limit away, or when the bid is executed or cancelled.
• The rulebook writes the offer paragraph's move trigger as an increase and its execution trigger as the bid. Both paragraphs say the reference price "increases", and the offer paragraph's second trigger reads "if the bid is executed or cancelled". Read the printed text rather than assuming a mirror image.

What Are the Designated Percentage and the Defined Limit?

The price of a stock for this purpose is the closing price on the previous trading day, or, if no closing price exists, the last sale reported to the Consolidated Tape on the previous trading day.

Exam Tip: Gotchas

• The widened windows belong to Designated Stocks alone. The rule defines only two classes, and both price tiers of an Other NMS Stock carry one percentage all day, so a scenario set at 9:35 a.m. in a stock outside the indices still uses 28% or 30%.

What Are the Minimum Quotation Increments?

The minimum quotation increment for quotations of $1.00 or above in all ADF-eligible securities is $0.01. For quotations below $1.00 it is $0.0001.

Quotations failing to meet that standard shall be rejected.

That increment is the facility's own standard, and it does not displace the federal minimum pricing increment. Under the sub-penny rule, the federal increment at or above $1.00 is $0.005 for an NMS stock whose Time Weighted Average Quoted Spread during the evaluation period was $0.015 or less. That rule is covered in the unit on Regulation NMS.

Exam Tip: Gotchas

• The consequence is rejection, not a violation to be corrected later. A quotation entered in the wrong increment never reaches the facility's book.

When Must a Facility Trading Center Execute Against Its Displayed Quotation?

Consistent with the firm quote duty in the quotation rule, an ADF trading center that receives an offer to buy or sell from another broker-dealer shall execute a transaction for at least a normal unit of trading at its displayed quotations as disseminated through the ADF at the time of receipt of that offer.

Where the ADF trading center displays a quotation for a size greater than a normal unit of trading, it shall, on receipt of such an offer, execute a transaction at least at the size displayed.

There is a separate rule for a large incoming offer. It applies where an ADF trading center receives an offer to buy or sell from another broker-dealer in any amount that is at least one normal unit of trading greater than its published quotation size as disseminated through the facility at the time of receipt.

Where the ADF trading center then executes a transaction in fewer shares than the size of that offer, it shall immediately after that execution display a revised quotation at a price inferior to its previous published quotation.

Its failure to execute the offer in an amount greater than its published quotation size shall not constitute a violation of the firm quote paragraph.

Exam Tip: Gotchas

• The partial fill is the trigger for a worse quotation, not for a violation. The rule says outright that failing to trade beyond the published size is not a breach of the firm quote paragraph, and the consequence is a revised quotation at an inferior price.
• The one-normal-unit gap is part of the trigger. The revised quotation duty arises only where the incoming offer is at least one normal unit of trading larger than the published quotation size.

Who May Enter Quotations Into the Facility?

Quotations and quotation sizes in ADF-eligible securities may be entered into the ADF only by:

• A registered reporting ADF market maker;
• A registered reporting ADF electronic communication network (ECN); or
• Another entity FINRA has approved to function in such a capacity.

The ADF's protected quotation will be identified by FINRA based on price, size and time priority.

What Sub-Round-Lot Orders Must Reach the Processors?

For ADF-eligible securities, an ADF market participant shall provide to FINRA, for dissemination to the exclusive securities information processors (SIPs), two orders:

• Its highest priced order to buy in an amount less than a normal unit of trading that is priced at or higher than the national best bid; and
• Its lowest priced order to sell in an amount less than a normal unit of trading that is priced at or lower than the national best offer.

Exam Tip: Gotchas

• Sub-round-lot interest is reported only when it is at or better than the inside. An odd-lot buy order priced below the national best bid falls outside the duty entirely.

What Should You Check on Exam Day?

• Confirm the security is one in which the member is a registered reporting ADF market maker before applying the Two-Sided Obligation at all.
• After a halt, suspension or pause, look for the first regular way transaction on the primary listing market; pricing obligations do not restart on the resumption notice alone.
• Match the stock to its class first, then read the clock: only a Designated Stock widens to 20% and 21.5%.
• On a partial fill of an oversized incoming offer, check for the immediate revised quotation at an inferior price rather than for a firm quote violation.
• Check the quotation increment against the $1.00 line; a non-conforming quotation is rejected outright.