Dissemination of and Access to Quotations

Two rules do the work here. The quotation rule says what a venue must collect and what a member must honor.

The access rule says what a trading center may charge for reaching that quotation, and what written rules each national securities exchange and national securities association must establish, maintain and enforce about locked and crossed markets. Both run on the Regulation NMS definitions for national market system (NMS) securities, so the definitions come first.

Who Is the Responsible Broker or Dealer Behind a Published Quotation?

For a bid or offer communicated on a national securities exchange, the responsible broker or dealer is any member of that exchange who communicates a bid or offer for an NMS security to another member, at the location or locations, or through the facility or facilities, the exchange designates for trading in that security, as either principal or agent.

Two provisos sit inside that definition:

• Where two or more members of an exchange have communicated bids or offers for an NMS security at the same price, each of them is a responsible broker or dealer for that bid or offer, subject to the rules of priority and precedence then in effect on that exchange.
• Where a bid or offer is transmitted from one member to another member who undertakes to represent it on the exchange as agent, only the last member who undertakes to represent it as agent is the responsible broker or dealer for it.

For bids and offers communicated by a member of an association to a broker, dealer or customer, the responsible broker or dealer is the member communicating the bid or offer, regardless of whether that bid or offer is for its own account or on behalf of another person.

Exam Tip: Gotchas

• A shared price does not pick one firm. When several exchange members quote at the same price, every one of them is a responsible broker or dealer for its own bid or offer, and the exchange's priority and precedence rules decide the order in which they trade.
• An agency chain collapses to the last link. Where a bid or offer is passed from member to member and each undertakes to represent it as agent, only the last one carries the responsible broker or dealer label.

Which Quotation Terms Does the Rule Run On?

A protected bid or protected offer is a quotation in an NMS stock that meets all three of these limbs: it is displayed by an automated trading center; it is disseminated pursuant to an effective national market system plan; and it is an automated quotation that is the best bid or best offer of a national securities exchange, or the best bid or best offer of a national securities association.

A manual quotation is therefore never protected, because the third limb requires an automated quotation. The automated-quotation conditions and the trade-through prohibition itself are covered in the unit on Regulation NMS.

An actionable indication of interest (IOI) is any indication of interest that conveys, explicitly or implicitly, all four of the following, with respect to any order available at the venue sending it: symbol; side, meaning buy or sell; a price equal to or better than the national best bid for buy orders and the national best offer for sell orders; and a size at least equal to one round lot.

Specified persons, for a notification about unusual market conditions or an election that makes a security a subject security, means each vendor; each plan processor; and the processor for the Options Price Reporting Authority, in the case of a notification for a subject security that is a class of securities underlying options admitted to trading on any national securities exchange.

Exam Tip: Gotchas

• A protected quotation needs all three limbs, not the best price alone. A quotation can be the best bid on its venue and still fail the test, because it must also be displayed by an automated trading center and disseminated under an effective national market system plan.
• An actionable indication of interest is defined by four elements together. An indication that carries symbol, side and price but a size below one round lot is not actionable, and neither is one whose price is worse than the national best bid or offer on its side.

Which Securities Must a Venue Publish Quotations For?

The collection duty runs only to subject securities, and the definition has a different shape for an exchange and for a member of an association.

Both shapes are built on a defined term. An exchange-traded security is any NMS security, or class of NMS securities, listed and registered, or admitted to unlisted trading privileges, on a national securities exchange. Provided, however, that securities not listed on any national securities exchange that are traded pursuant to unlisted trading privileges are excluded.

For a national securities exchange, a subject security is:

• Any exchange-traded security other than one for which the executed volume of that exchange, during the most recent calendar quarter, was one percent or less of the aggregate trading volume for that security as reported under an effective transaction reporting plan or effective national market system plan; and
• Any other NMS security for which the exchange has an election in effect to collect, process and make available to a vendor bids, offers, quotation sizes and aggregate quotation sizes communicated on that exchange.

An exchange makes that election by collecting, processing and making available bids, offers, quotation sizes and aggregate quotation sizes in the security. Where the security is listed or admitted to unlisted trading privileges on only one exchange and no OTC market maker trades it, the election is made by notifying all specified persons, effective at the opening of trading on the next business day.

An election ceases to be in effect when the exchange stops making those bids, offers and quotation sizes available.

For a member of a national securities association, a subject security is:

• Any exchange-traded security for which the member acts in the capacity of an OTC market maker, unless the executed volume of that member during the most recent calendar quarter was one percent or less of that aggregate trading volume; and
• Any other NMS security for which the member acts as an OTC market maker and has an election in effect to communicate bids, offers and quotation sizes to its association for the purpose of making them available to a vendor.

Exam Tip: Gotchas

• The one percent test runs the same way on both branches. For an exchange the security drops out of the definition where that exchange's own executed volume was one percent or less; for an association member it drops out where the member's own executed volume was one percent or less. The real difference is the added OTC market maker capacity requirement, not the direction of the test.
• An election is a second, independent route in. A venue or an OTC market maker can bring an NMS security inside the definition by electing to collect or communicate its quotations, even where the volume test would not.

What Must an Exchange or Association Collect and Publish?

Every exchange and association must establish and maintain procedures and mechanisms for collecting bids, offers, quotation sizes and aggregate quotation sizes from the responsible brokers or dealers who are its members, processing them, and making them available to vendors.

Each exchange must, at all times the exchange is open for trading, collect, process and make available to vendors the best bid, the best offer and aggregate quotation sizes for each subject security listed or admitted to unlisted trading privileges that is communicated on any national securities exchange by any responsible broker or dealer. Two categories are excluded:

• Any bid or offer executed immediately after communication, and any bid or offer communicated by a responsible broker or dealer other than an exchange market maker which is cancelled or withdrawn if not executed immediately after communication.
• Any bid or offer communicated during a period when trading in that security has been suspended or halted, or prior to the commencement of trading in that security on any trading day, on that exchange.

An exchange market maker is any member of a national securities exchange that is registered as a specialist or market maker under the rules of that exchange. That registration is the whole test for the narrower half of the first exclusion.

Each association must, at all times that last sale information for NMS securities is reported under an effective transaction reporting plan, collect, process and make available to vendors the best bid, best offer and quotation sizes communicated otherwise than on an exchange by each member acting in the capacity of an OTC market maker for each subject security, and the identity of that member.

Two things are excluded from that association duty: any bid or offer executed immediately after communication, and any period during which over-the-counter trading in that security has been suspended.

Nothing in the quotation rule precludes an exchange or association from making available to vendors indications of interest, or bids and offers, for a subject security at any time it is not required to do so. The exclusions set a floor on what must be published, not a ceiling on what may be.

Each exchange must also establish and maintain procedures for ascertaining and disclosing to other members of that exchange, on presentation of orders sought to be executed in reliance on the firm quote duty, the identity of the responsible broker or dealer who made a published bid or offer and the quotation size associated with it.

Exam Tip: Gotchas

• The halt exclusion is written into the exchange branch of the collection duty. A quotation communicated on an exchange while trading in that security is suspended or halted, or before trading commences that day on that exchange, is not part of the data that exchange must collect and publish. The association branch is excluded only during a period when over-the-counter trading in that security has been suspended.
• The immediate-execution exclusion has two halves and the second is narrower. Every bid or offer executed immediately after communication drops out, but the cancel-or-withdraw half reaches only a responsible broker or dealer that is not an exchange market maker.

What Happens When Unusual Market Conditions Overwhelm an Exchange?

The trigger is a determination the exchange makes at any time it is open for trading, under rules the Commission has approved. It is that the level of trading activities, or the existence of unusual market conditions, leaves the exchange incapable of collecting, processing and making the required data available in a manner that accurately reflects the current state of the market on that exchange.

On making that determination, the exchange must immediately notify all specified persons of it.

On that notification, three things follow:

• Responsible brokers or dealers that are members of that exchange are relieved of the firm quote duty and of the thirty-second listed-option response duty for that security.
• The exchange is relieved of its collection duty and of its duty to ascertain and disclose the responsible broker or dealer's identity for that security.
• Provided, however, that the exchange will continue, to the maximum extent practicable under the circumstances, to collect, process and make that data available to vendors.

While the relief runs, the exchange must monitor the activity or conditions that caused the notification, and must immediately renotify all specified persons once it is again capable. On renotification, every relieved obligation revives.

Exam Tip: Gotchas

• The relief is not a shutdown. The exchange still has to collect, process and publish to the maximum extent practicable under the circumstances, so a scenario describing a total stop is describing more than the rule allows.
• Both the relief and its end run on notice to specified persons. Nothing revives when conditions improve; obligations come back when the exchange renotifies vendors, plan processors and, where the security underlies listed options, the options price reporting processor.

When Must a Responsible Broker or Dealer Honor Its Published Quotation?

Each responsible broker or dealer must promptly communicate its best bids, best offers and quotation sizes for any subject security to its exchange or association, under the procedures that venue establishes.

It must then execute any order to buy or sell a subject security, other than an odd-lot order, presented to it by another broker or dealer, or any other person belonging to a category of persons with whom it customarily deals.

The execution must be at a price at least as favorable to that buyer or seller as its published bid or published offer, in any amount up to its published quotation size.

Any commission, commission equivalent or differential the firm customarily charges in connection with executing such an order is excluded from that price comparison.

Exam Tip: Gotchas

• The duty is not limited to other broker-dealers. It also runs to any other person in a category of persons the responsible broker or dealer customarily deals with, so a customary institutional counterparty is inside the rule.
• An odd-lot order is carved out of the firm quote duty by its own terms. The exclusion sits in the obligation itself, not in the exceptions that follow it.

When Is That Firm Quote Obligation Reduced or Lifted?

Two sets of circumstances change the answer, and they do different things.

A revised quotation size caps the obligation. A responsible broker or dealer need not buy or sell in an amount greater than a revised quotation size if either:

• Prior to the presentation of an order, it communicated a revised quotation size to its exchange or association; or
• At the time an order is presented, it is in the process of effecting a transaction in that security and, immediately after completing that transaction, it communicates a revised quotation size.

A revised bid or offer lifts the obligation. There is no duty to execute if either:

• Before the order sought to be executed is presented, the firm communicated a revised bid or offer; or
• At the time the order is presented, the firm is in the process of effecting a transaction and, immediately after completing it, communicates a revised bid or offer.

That second branch carries a proviso. Where the firm revises its bid or offer during a transaction in progress, it is nonetheless obligated to execute the order at its revised bid or offer in any amount up to its published quotation size or revised quotation size.

Exam Tip: Gotchas

• A revised bid or offer mid-transaction does not free the firm from the order. The proviso keeps the execution duty alive at the new price, up to the published or revised size, so the price moves and the obligation does not disappear.
• The size branch and the price branch answer different questions. A revised size limits how much the firm must trade; a revised bid or offer changes whether, and at what price, it must trade at all.

What May an Exchange, a Market Maker or a Vendor Put on a Display Device?

Subject to the permission to publish voluntarily, the rule bars display of quotations in securities that are not subject securities:

• No exchange and no OTC market maker may make available, disseminate or otherwise communicate to any vendor, directly or indirectly, for display on a terminal or other display device, any bid, offer, quotation size or aggregate quotation size for an NMS security that is not a subject security with respect to that exchange or OTC market maker.
• No vendor may disseminate or display on a terminal or other display device any such bid, offer, quotation size or aggregate quotation size from that exchange or OTC market maker.

Exam Tip: Gotchas

• The display prohibition binds the vendor as well as the source. Two separate limbs cover the same quotation, so a vendor that displays a non-subject-security quotation is in breach on its own account.

How Is a Priced Order Entered Into an Electronic Communication Network Treated?

An electronic communication network (ECN), for this branch, is any electronic system that widely disseminates to third parties orders entered in it by an exchange market maker or OTC market maker, and permits those orders to be executed against in whole or in part. Two systems are excluded from the term:

• Any system that crosses multiple orders at one or more specified times at a single price the system sets, whether by algorithm or by any derivative pricing mechanism, and does not allow orders to be crossed or executed against directly by participants outside those times; or
• Any system operated by, or on behalf of, an OTC market maker or exchange market maker that executes customer orders primarily against the account of that market maker as principal, other than riskless principal.

Entry of any priced order for an NMS security by an exchange market maker or OTC market maker in that security into an ECN that widely disseminates the order is deemed to be two things at once:

• A bid or offer under the quotation rule, to be communicated to the market maker's exchange or association, for at least the minimum quotation size the venue's rules require if the priced order is for the account of a market maker, or the actual size of the order up to that minimum quotation size if the priced order is for the account of a customer; and
• A communication of a bid or offer to a vendor for display, for purposes of the display prohibition above.

The market maker is deemed in compliance with the first of those if the ECN takes either of two routes.

The first route has two parts, joined by "and".

Part one: the ECN provides an exchange, association or exclusive processor the prices and sizes of the orders at the highest buy price and the lowest sell price for that security entered in and widely disseminated by it by exchange market makers and OTC market makers. Those prices and sizes are included in the quotation data the venue makes available to vendors.

Part two: the ECN also provides any broker or dealer the ability to effect a transaction with such a widely disseminated priced order that is:

• Equivalent to the ability of any broker or dealer to effect a transaction with an exchange market maker or OTC market maker under the rules of the venue to which the ECN supplies those bids and offers; and
• At the price of the highest priced buy order or lowest priced sell order, or better, for the lesser of the cumulative size of those market-maker priced orders at that price, or the size of the execution sought.

The second route is that the ECN is an alternative trading system (ATS) that displays orders and provides the ability to effect transactions with them under the Regulation ATS order display and execution access requirements, and is otherwise in compliance with Regulation ATS.

Those Regulation ATS requirements bite on an NMS stock only where the system both displays subscriber orders to any person other than its own employees and, during at least 4 of the preceding 6 calendar months, had an average daily trading volume of 5 percent or more of the aggregate average daily share volume for that stock as reported by an effective transaction reporting plan.

Where they bite, the system must supply an exchange or association the prices and sizes of the orders at the highest buy price and the lowest sell price displayed to more than one person in the system, for inclusion in the published quotation data.

It must also give any broker-dealer with access to that venue an execution ability equivalent to trading with other displayed orders, at the best displayed price, for the lesser of the cumulative size at that price or the size sought. The rest of Regulation ATS is covered in the unit on display, execution and trading systems.

Exam Tip: Gotchas

• The deemed quotation size depends on whose account the order is for. A market maker's own priced order counts for at least the venue's minimum quotation size; a customer's priced order counts for the actual size of the order, capped at that minimum.
• The volume threshold is a four-of-six-months test, not a single month. A system crosses into the display and access requirements only after averaging 5 percent or more of consolidated volume in at least 4 of the preceding 6 calendar months, and only while it also displays subscriber orders outside its own staff.

How Do the Quotation Rules Work for Listed Options?

An exchange or association is not required to collect listed-option quotation sizes and aggregate quotation sizes from its members, or make them available to vendors, if it establishes by rule and periodically publishes the quotation size for which those members must execute an order in an options series that is a subject security at their published bid or offer.

It may also do either of the following:

• Establish by rule and periodically publish a quotation size, which shall not be for less than one contract, for which members must execute an order for the account of a broker or dealer in an amount different from the size that applies to an order for the account of a customer.
• Collect and make available customer-order sizes, and establish by rule and periodically publish the size, again not less than one contract, for which members must execute an order for the account of a broker or dealer.

Where the venue's rules do not require members to communicate their listed-option quotation sizes, a member responsible broker or dealer is relieved of the duty to communicate those sizes, and it satisfies the firm quote duty by executing any order to buy or sell a listed option up to the size the venue's rules establish.

The thirty second response. On receiving an order to buy or sell a listed option in an amount greater than the quotation size the venue's rules establish, or its published quotation size, a responsible broker or dealer must, within thirty seconds, either:

• Execute the entire order; or
• Execute that portion of the order equal to at least the quotation size the venue's rules establish, to the extent that the exchange or association does not collect and make available to vendors quotation size and aggregate quotation size, or at least its published quotation size, and revise its bid or offer.

There is no obligation to execute at all if any of the revised-size or revised-quotation circumstances above exist, or if the order is presented during a trading rotation in that listed option.

Exam Tip: Gotchas

• The rule-established floor is conditional and the published-size floor is not. The two floors are joined by "or", and only the first carries a condition: the venue's established size counts only to the extent that venue does not itself collect and publish quotation size and aggregate quotation size.
• A trading rotation suspends the execution duty for that option. So does any of the revised quotation size or revised bid or offer circumstances, because for a listed option the carve-out points at all of them, not only at the ones that lift the duty for an equity subject security.

Who Owes What on Access, Fees and Locked or Crossed Quotations?

The access rule addresses four things: access terms, fees, fee transparency, and locked or crossed quotations.

• Access through an SRO trading facility. An exchange or association shall not impose unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access through a member to the quotations in an NMS stock displayed through its SRO trading facility.
• Access through an SRO display-only facility, level and cost. A trading center that displays quotations in an NMS stock through such a facility must provide a level and cost of access substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities in that stock.
• Access through an SRO display-only facility, terms. That trading center must not impose unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access to those quotations through a member, subscriber or customer of the trading center.

The fee cap. A trading center shall not impose, nor permit to be imposed, any fee or fees for the execution of an order against a protected quotation of the trading center, or against any other quotation of it that is the best bid or best offer of a national securities exchange or of a national securities association in an NMS stock, that exceed or accumulate to more than:

Fee transparency. A national securities exchange shall not impose, nor permit to be imposed, any fee, nor provide or permit to be provided any rebate or other remuneration, for executing an order in an NMS stock that cannot be determined at the time of execution.

Locked and crossed quotations. Each exchange and association must establish, maintain and enforce written rules that do three things:

• Require its members reasonably to avoid displaying quotations that lock or cross any protected quotation in an NMS stock, and displaying manual quotations that lock or cross any quotation in an NMS stock disseminated under an effective national market system plan.
• Are reasonably designed to assure the reconciliation of locked or crossed quotations in an NMS stock.
• Prohibit members from engaging in a pattern or practice of displaying either of those, other than as an exception in the rules the venue established under the avoidance requirement permits.

Exam Tip: Gotchas

• The fee cap and the transparency rule bind different parties. The cap on execution fees applies to any trading center; the ban on a fee or rebate that cannot be determined at execution applies to a national securities exchange.
• The locked and crossed rules ask for avoidance, not prevention. Members must reasonably avoid displaying a quotation that locks or crosses a protected quotation, or a manual quotation that locks or crosses a quotation disseminated under an effective national market system plan. The venue's rules must prohibit a pattern or practice of such displays, other than as an exception in its own avoidance rules permits.

What Should You Check on Exam Day?

• Confirm whether the security is a subject security for that venue before applying any collection or publication duty; the volume test and the election are separate routes in.
• When a firm revises during a transaction in progress, check which it revised: a size caps the amount, a bid or offer moves the price but still obliges execution up to size.
• Read a halt fact pattern against the collection duty first; on an exchange, quotations sent during a halt or before the open are not part of the data that exchange must publish.
• On a listed-option response, confirm the order exceeds the established or published size, then apply the thirty-second clock and the two floors.
• Check the fee question's party: the per-share cap binds a trading center, the undeterminable fee or rebate ban binds a national securities exchange.