Quick Answer
Specialists, members their exchange authorizes to perform substantially similar functions, and OTC market makers must publish immediately a bid or offer reflecting a customer limit order held: price and full size where it improves their quote, full size where it ties their quote, ties the national best bid or offer, and moves their size more than de minimis.
The limit order display rule is what stops a firm from holding a customer's better price out of sight while quoting its own worse one. It applies for all national market system (NMS) stocks, and it binds an exchange specialist, a member the exchange authorizes to perform substantially similar functions, or an over-the-counter market maker.
The duty reaches each customer limit order that firm holds that meets a display trigger and no exception.
Two things separate a right answer from a wrong one here: who the duty falls on, and how much of the order gets shown at each price relationship.
Who Must Display a Customer Limit Order?
The rule names two duty-bearers, and only two:
- Each member of a national securities exchange that is registered by that exchange as a specialist, or is authorized by that exchange to perform functions substantially similar to that of a specialist
- Each registered broker or dealer that acts as an over-the-counter (OTC) market maker
The order at stake is a customer limit order, which is an order to buy or sell an NMS stock at a specified price that is not for the account of either a broker or dealer, and which expressly includes an order a broker or dealer transmits on behalf of a customer.
Exam Tip: Gotchas
- A firm that is neither a specialist, nor a member its exchange authorizes to perform substantially similar functions, nor an OTC market maker in the stock carries no display duty here. The rule attaches to those capacities, so an ordinary broker holding a customer's limit order is outside it.
- The specialist branch has two halves. It reaches a member registered as a specialist and also a member the exchange has authorized to perform functions substantially similar to a specialist's, so the label alone is not the test.
- A limit order routed through a firm is still a customer limit order. The definition's proviso pulls in an order a broker or dealer transmits on behalf of a customer, which is how a retail order reaches this rule at all.
What Must Be Published, and How Fast?
The duty-bearer must publish immediately a bid or offer that reflects the order. What it publishes depends on how the customer's price compares with its own.
Where the order would improve the firm's own quote, publish the price and the full size of each customer limit order held that is at a price that would improve the bid or offer of that specialist or OTC market maker in that security.
Where the order is at the same price, publish the full size of each customer limit order held that meets all three of these:
- It is priced equal to the bid or offer of that specialist or OTC market maker for that security
- It is priced equal to the national best bid or national best offer
- It represents more than a de minimis change in relation to the size associated with that firm's bid or offer
Those three conditions are conjunctive. An order equal to the firm's own quote but not equal to the national best bid or national best offer does not trigger the size-display duty at all. The rule sets no numeric threshold for de minimis.
Exam Tip: Gotchas
- The customer's price is published only when it improves the firm's quote. In the equal-price case the rule adds the order's full size to the displayed quote and nothing else, because the price on the screen is already the same.
- The equal-price test needs both prices to match, not just one. Equal to the firm's own quote is not enough; the order must also be equal to the national best bid or national best offer before any size has to be shown.
- A tiny order at the same price can be left out. The third condition asks for more than a de minimis change in relation to the firm's own displayed size, and the rule leaves that judgment undefined by number.
- The timing word is immediately. The rule text names no number of seconds or minutes. The Securities and Exchange Commission reads it to require display as soon as practicable after receipt, which under normal market conditions means no later than 30 seconds after receipt. That outer limit is not a safe harbor, so a firm may not intentionally delay display as a matter of course.
Which Customer Limit Orders Are Excepted?
The display requirements do not apply to any customer limit order in one of seven categories:
| The customer limit order | Detail |
|---|---|
| Is executed upon receipt | Nothing is left to display |
| Is placed by a customer who expressly requests that the order not be displayed | The request can be made either at the time the order is placed, or prior thereto pursuant to an individually negotiated agreement with respect to that customer's orders |
| Is an odd-lot order | An order for less than a round lot |
| Is a block size order | Unless a customer placing the order requests that the order be displayed |
| Is delivered immediately upon receipt to a national securities exchange or national securities association-sponsored system, or to an electronic communications network (ECN) | The ECN branch is conditioned on that network complying with the quotation rule's electronic communications network paragraph with respect to that order |
| Is delivered immediately upon receipt to another exchange member or OTC market maker | Conditioned on that firm complying with the limit order display rule with respect to that order |
| Is an "all or none" order | Named on its own |
Two of those exceptions turn on what the customer asks for, and they run in opposite directions. The non-display exception exists because the customer asks for non-display. The block size exception is switched off when the customer asks for display.
The two pass-through exceptions also differ. Delivery to another exchange member or OTC market maker is conditioned on that recipient complying with the limit order display rule for that order. In the other exception the compliance condition attaches to the electronic communications network branch; delivery immediately upon receipt to an exchange or association-sponsored system carries no compliance condition of its own.
Exam Tip: Gotchas
- The non-display request has two permitted timings. A customer may make it when placing the order, or beforehand under an individually negotiated agreement covering that customer's orders, so a standing arrangement is enough.
- A block size order is excepted by default and displayed on request. That is the reverse of the customer request exception, where the default is display and the request buys non-display.
- Passing the order on does not always come with a condition. Immediate delivery to an exchange or association-sponsored system is excepted outright, while the electronic communications network branch and the other-firm branch each carry a compliance condition tied to that order.
- An "all or none" order is excepted by name. It is a separate category and does not have to be an odd-lot or a block to fall outside the display duty.
What Counts as an Electronic Communications Network Here?
The Regulation NMS definitions set out electronic communications network for the purposes of one paragraph of the quotation rule, which is the paragraph the display exception points at. It 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.
The term then excludes two systems:
- Any system that crosses multiple orders at one or more specified times at a single price set by the system, 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
- 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
A system either exclusion removes is not an electronic communications network for that paragraph, so immediate delivery to it does not reach that branch of the exception. The quotation rule itself, including the paragraph the condition points at, is covered in the unit on disseminating quotes and trade advertisements.
Exam Tip: Gotchas
- The definition is scoped to one paragraph of the quotation rule. It is not a general definition of an electronic trading venue, and the display exception borrows it only because that is the paragraph the condition names.
- A single-price crossing system is excluded by name. Crossing multiple orders at set times at a price the system sets, with no execution outside those times, takes a venue out of the term even though it is electronic and it matches orders.
What Should You Check on Exam Day?
- Confirm the firm is an exchange specialist, a member performing substantially similar functions, or an OTC market maker; no other capacity carries this display duty.
- Publish the price and full size only where the customer's order would improve the firm's own quote in that security.
- For an equal-priced order, check all three conditions: equal to the firm's quote, equal to the national best bid or offer, and more than a de minimis size change.
- Run the seven exceptions before concluding a firm breached the rule, and check whether the customer asked for display or for non-display.
- On a pass-through, ask whether the destination is an exchange or association system, an electronic communications network, or another member, because only two of those carry a compliance condition.