FINRA Quotation and Trading Facility Rules

These rules govern the mechanics of trading itself, distinct from the conduct rules covering ethics and customer dealings elsewhere in the outline.

Quotation and Trade-Reporting Framework - Overview

FINRA's quotation-and-trade-reporting rule book is a comprehensive set of rules governing how members handle quotation, order, and transaction reporting. Key scope areas include:

Exam Tip: Gotchas

• The quotation-and-trade-reporting framework covers trading mechanics; the conduct framework covers ethics and customer dealings. Do not confuse them. If a question asks about trading practices or reporting, look for quotation-and-trade-reporting requirements; if it asks about communications, suitability, or supervision, look at conduct rules.

NMS Stock Trading Rules

Key rules for exchange-listed securities:

• Trading otherwise than on an exchange: Governs OTC trading of exchange-listed securities (third market transactions). FINRA publishes aggregate off-exchange trading data on a delay: weekly totals no earlier than two weeks after the week for Tier 1 securities and four weeks after the week for other reportable NMS securities, and monthly totals and block statistics no earlier than one month after month-end. Security-level data is aggregated (not broken out) for a member averaging fewer than 200 trades per day in that security.
• Trading halts: Authorizes FINRA to halt OTC trading when an exchange halts trading in the same security. FINRA may also independently halt off-exchange trading, or close an affected FINRA reporting facility, for a severe and continuing market-wide disruption caused by a relevant system malfunction.
• Trading halts due to extraordinary market volatility: Coordinates with exchange-imposed halts during extreme market conditions. After a Level 1 or Level 2 market-wide halt, FINRA may permit off-exchange trading to resume only if the primary listing market has not reopened within 15 minutes and trading has started on another national exchange. A Level 3 halt lasts the rest of the trading day, off-exchange included.
• Transactions related to initial public offerings (IPOs): An off-exchange transaction in a covered IPO security cannot occur until the listing exchange has opened trading and disseminated its opening transaction. "Covered" means a registered offering by an issuer that was not already an Exchange Act reporting issuer immediately before its registration statement.

Exam Tip: Gotchas

• OTC trading halts coordinate with exchange halts. When an exchange halts trading in a security, FINRA halts OTC trading in that same security. They are not independent.
• A brand-new IPO cannot trade off-exchange before the listing exchange opens it. The exam may describe a broker-dealer trying to execute an IPO trade off-exchange before the opening transaction; that violates the covered-IPO restriction.

OTC Equity Quotation and Trading

• Governs quotation and trading activities in OTC equity securities not listed on a national exchange
• Includes registration requirements for market makers, quotation obligations, and minimum size requirements
• Pricing increments: Priced OTC quotations must follow the required minimum pricing increments
• No locking or crossing: A member may not lock (post a bid equal to another's ask, or vice versa) or cross (post a bid above another's ask, or vice versa) another OTC quotation medium
• Issuer-action processing: FINRA must process company-related actions (symbol or name changes, mergers, dividends, stock splits) affecting an OTC equity security before a member changes its quotation or trading treatment of that security

Exam Tip: Gotchas

• Locking and crossing another market's quote is prohibited, not just trading through it. A member cannot post a bid that equals or exceeds another market's ask (or an ask that equals or is below another market's bid).
• A member cannot jump ahead of FINRA's own processing of a corporate action; it must wait for FINRA to process the action before changing how it quotes or trades the security.

Order Entry and Execution Practices

• Governs how member firms enter and execute orders
• Specifically prohibits trade shredding: splitting an order or its execution into multiple pieces primarily to maximize monetary or in-kind amounts received (such as rebates or credits)

Adjustment of Open Orders

The order-adjustment rule requires adjustment of open orders on the ex-dividend date for certain corporate actions:

• Reduce orders: Open buy limit orders, open sell stop orders, and open stop-limit orders below the market are reduced by the amount of the dividend on the ex-date
• Orders marked "do not reduce" (DNR) are exempt from adjustment

Example: If a stock has a $0.50 cash dividend and a customer has an open buy limit order at $40:

• On the ex-date, the limit price is automatically reduced to $39.50
• Unless the order was marked DNR

Exam Tip: Gotchas

• Sell limit orders are NOT reduced on the ex-date. Only buy limits, sell stops, and stop-limits below the market get adjusted. The customer wants to sell at a higher price, so reducing makes no sense.
• Orders marked DNR are never adjusted, regardless of order type.

What Should You Check on Exam Day?

• Can you identify a trade-shredding scenario (splitting an order primarily to maximize rebates)?
• Do you know FINRA's OTC trading halt follows the exchange's halt in the same security, rather than acting independently?
• Given an order type and the ex-dividend date, can you compute whether and how much the limit price is reduced?
• Do you know a covered IPO security cannot trade off-exchange until the listing exchange opens and disseminates its opening transaction?
• Can you identify a locking or crossing violation versus a permissible OTC quote?