Offers at Stated Prices

The offers at stated prices rule is one sentence long, and its supplementary material carries almost everything a trader is tested on: what backing away is, what a firm trading market is expected to do, and two standing duties about how quotations are identified and staffed.

What Does the Offers at Stated Prices Rule Require?

No member shall make an offer to buy from or sell to any person any security at a stated price unless the member is prepared to purchase or sell, as the case may be, at that price and under such conditions as are stated at the time of that offer to buy or sell.

The counterparty is described as any person. The sentence does not narrow it to a broker-dealer, to a registered market maker, or to a customer.

Exam Tip: Gotchas

• The conditions are part of the commitment, not decoration. The member must be prepared to trade at the stated price and under the conditions it stated at the time, so a condition invented after the order arrives is outside the rule's protection.
• The rule is written around a stated price, not around a displayed quotation. A price quoted over the phone to any person engages it just as a screen quotation does.

What Is Backing Away?

Members and persons associated with members in the over-the-counter market make trading decisions and set prices for customers on the basis of telephone and electronic quotations, including quotations displayed in an inter-dealer quotation system.

In some instances a dealer's quotations, purportedly firm, are in fact so qualified upon further inquiry as to constitute "backing away" by the quoting dealer. Dealers who publish quotations in inter-dealer quotation systems have also been found unwilling to make firm bids or offers upon inquiry, in a way that poses a question about the validity of the quotations originally published.

Such backing away from quotations disrupts the normal operation of the over-the-counter market.

Exam Tip: Gotchas

• Backing away covers both a qualification on inquiry and an unwillingness to make a firm price. A dealer that answers an inquiry by piling on conditions has qualified a purportedly firm quotation, and a dealer unwilling to make firm bids or offers upon inquiry is caught as well. The supplementary material describes both and calls both backing away.

What Is Expected of a Member Making a Firm Trading Market?

Members change inter-dealer quotations constantly in the course of trading. Under normal circumstances, where the member is making a "firm trading market" in any security, it is expected at least to buy or sell a normal unit of trading in the quoted stock at its then prevailing quotations.

That expectation does not apply where the quotation was clearly designated as not firm, or firm for less than a normal unit of trading, when supplied by the member.

Exam Tip: Gotchas

• The supplementary material says expected, not required. The obligation is framed as an expectation under normal circumstances, which is weaker wording than the firm quote duty in the quotation rule.
• The escape is a designation made when the quotation is supplied. A qualification offered later, when the order arrives, is the definition of backing away rather than a defense to it.

When Does a Transaction in Progress Limit the Obligation?

There is one relief, and it is limited to size. It applies where, at the time an order for the purchase or sale of the quoted security is presented, the member is in the process of effecting a transaction in that quoted security, and immediately after the completion of that transaction communicates a revised quotation size.

In that case the member shall not be obligated to purchase or sell the quoted security in an amount greater than that revised quotation size.

Exam Tip: Gotchas

• The relief caps the size and does not cancel the trade. The member still trades at its prevailing quotation; it simply is not obliged to go beyond the revised quotation size.
• Both halves of the timing must be present. The transaction must already be in progress when the order is presented, and the revised size must be communicated immediately after that transaction completes.

What Two Duties Does the Supplementary Material Add?

To ensure the integrity of quotations, the supplementary material adds two duties with different bearers:

• Every member has an obligation to correctly identify the nature of its quotations when they are supplied to others.
• Each member furnishing quotations must ensure that it is adequately staffed to respond to inquiries during the normal business hours of such member.

It is then deemed inconsistent with the standards of commercial honor rule and the offers at stated prices rule if a member fails to fulfill its obligations as outlined above. That referent reaches everything the supplementary material has stated: the firm trading market expectation as well as these two duties.

Exam Tip: Gotchas

• The staffing duty is measured by the member's own normal business hours. It is not a market-hours test, so a firm quoting outside its own business day is judged against its own hours.
• The closing sentence sweeps up the whole supplementary material. Failing the firm trading market expectation, misidentifying a quotation, or being unreachable each offends both named rules.

What Two Terms Does This Rule Borrow?

For the purposes of this rule, two terms are borrowed rather than defined here:

• An inter-dealer quotation system takes its meaning from the OTC equity definitions, where it means any system of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers.
• A normal unit of trading for a national market system (NMS) stock means the round lot assigned to that NMS stock under the Regulation NMS definitions.

Exam Tip: Gotchas

• A normal unit of trading is not fixed at 100 shares by this rule. It is whatever round lot the Regulation NMS definitions assign to that NMS stock, so the answer depends on the delegation and not on a habit.

What Should You Check on Exam Day?

• Confirm the offer was made at a stated price to any person, then ask whether the member was prepared to trade at that price and on the stated conditions.
• Look for when the not-firm designation was made; only a designation supplied with the quotation takes the member outside the expectation.
• Where a transaction was in progress, check that the revised quotation size was communicated immediately after it completed.
• Separate the two added duties by bearer: every member identifies its quotations correctly, each member furnishing quotations staffs for inquiries.
• Read a normal unit of trading as the round lot assigned under the Regulation NMS definitions rather than as a fixed share count.