Quick Answer
Two market models split everything: the New York Stock Exchange auction runs one Designated Market Maker per stock, while Nasdaq and over-the-counter markets use multiple competing dealers. Firm quotes are binding; backing away is a violation. Circuit breakers pause the market at 7%, 13%, and 20%; Limit Up-Limit Down pauses one security. Customers get the worse side of the spread.
The whole unit on one sheet: who makes markets, which quotes bind, what stops trading, and the reporting systems.
How Are the Markets Structured?
- Primary market = new issues; secondary market = investors trading with each other. Market makers live in the secondary market.
- The four markets: First (on an exchange), Second (over-the-counter, OTC, of unlisted securities), Third (OTC of exchange-listed securities), Fourth (institution-to-institution via Electronic Communications Networks, ECNs).
- Auction market (NYSE): competitive bidding, one Designated Market Maker (DMM) per security. Dealer market (Nasdaq, OTC): competing dealers quote. Nasdaq is a dealer market even though it is an exchange.
How Do DMMs and OTC Market Makers Differ?
| Feature | NYSE DMM | Nasdaq / OTC Market Makers |
|---|---|---|
| Number per security | One | Multiple competing |
| Capacity | Agent and principal (never same trade) | Principal only (dealers) |
| Price discovery | Auction | Competing dealer quotes |
- Affirmative/negative obligation: the DMM steps IN to trade against the trend when public liquidity is insufficient, and steps BACK when public orders are sufficient.
- A security needs to meet exchange listing requirements before it gets a DMM assigned at all.
- OTC Markets tiers: OTCQX (highest disclosure, lowest risk), OTCQB (venture), OTC Pink (lowest disclosure, penny stocks and shells). Penny stocks cannot qualify for OTCQX.
What Are the Types of Quotations?
| Quote | Binding? | Used When |
|---|---|---|
| Firm | Yes; must execute at price and size | Default for inter-dealer systems |
| Subject | No; can change before executing | Wants flexibility |
| Workout | No; a price range, needs time | Illiquid securities |
| Nominal | No; informational only (must be labeled) | No active interest |
| Bid Wanted / Offer Wanted | No; soliciting interest | Municipal, thinly traded |
Which One-Liners Win Points?
- Customer sells at the bid, buys at the ask: always the worse side.
- National Best Bid and Offer (NBBO) = highest bid, lowest ask across all market centers; Regulation National Market System (Reg NMS) prevents trade-throughs.
- Backing away (refusing to honor a firm quote) violates just and equitable principles of trade.
- During a trading halt everything stops except activity the Limit Up-Limit Down plan permits: no trades, no quotes, no bid/offer-wanted indications.
- Order tickets need two time stamps: receipt and execution.
- Best execution applies to all customer orders; payment for order flow (PFOF) never excuses a worse price.
- A covered IPO cannot trade off-exchange until the listing exchange opens it and disseminates the opening transaction.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Market-wide circuit breakers | 7% (Level 1), 13% (Level 2), 20% (Level 3) |
| Level 1 / Level 2 halt duration | 15 minutes, only before 3:25 PM Eastern Time |
| Level 3 (20%) | Halts trading rest of day, any time |
| LULD limit state to pause | 15 seconds unresolved, then 5-minute pause |
| LULD reference price | Rolling 5-minute average |
| TRACE / EMMA reporting deadline | Within 15 minutes of execution |
| Penny stock threshold | Under $5 per share |
| NYSE block trade | 10,000+ shares or $200,000+ market value |
Transaction Reporting: Which System?
| System | Covers | Operator |
|---|---|---|
| TRACE | Corporate bonds, agency debt, asset-backed securities | FINRA |
| EMMA / RTRS | Municipal securities | MSRB |
| TRF (Trade Reporting Facility) | Listed stocks traded OTC (third market) | FINRA |
| ORF (OTC Reporting Facility) | Unlisted OTC equities | FINRA |
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ORF reports within 10 seconds of execution, much faster than TRACE/EMMA.
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Consolidated tape: Tape A (NYSE), Tape B (regional), Tape C (Nasdaq).
Which Gotchas Trip Students Up?
- Circuit breakers vs. LULD: market-wide circuit breakers halt everything on an S&P 500 drop; Limit Up-Limit Down (LULD) pauses a single National Market System security outside its price band.
- 3:25 PM cutoff: a 7% or 13% decline after 3:25 PM does NOT halt trading; only Level 3 (20%) can halt at any time.
- TRACE is not municipals: corporate bonds go through TRACE, munis go through EMMA.
- A DMM's principal trades require confirmation disclosure.
- Open-order adjustment on the ex-date: buy limits, sell stops, and stop-limits below the market are reduced by the dividend; sell limits are NOT. "Do not reduce" (DNR) orders are never adjusted.
- Interpositioning is a violation only when the added middleman produces a worse price.
- Penny stock disclosures (inside bid/ask, quantity, and total compensation) apply to OTC penny stocks only, not to a sub-$5 stock listed on Nasdaq or an exchange.
- Block size lets one member cross both sides, still at or within the NBBO.
One-Breath Recap
The NYSE auction runs one Designated Market Maker per stock with paired affirmative and negative obligations, while Nasdaq and over-the-counter markets use competing dealers, and only firm quotes bind. Customers take the worse side of the spread, Regulation NMS bars an execution through the national best bid and offer, circuit breakers stop the whole market at 7%, 13%, and 20% while Limit Up-Limit Down pauses one security, and each trade reports to its own system: TRACE for corporates, EMMA for munis, the Trade Reporting Facility for listed stocks traded over the counter, and the OTC Reporting Facility for unlisted ones.
Need more than the recap? Read the full Market Making and Quotations unit.