Introduction

Welcome to Market Making and Quotations - the unit that explains how securities actually get bought and sold in U.S. markets, who provides liquidity, and the rules that keep the process fair.

Exam Weight: Part of F4 11% (~14 questions across Trading & Settlement)

Video Resources

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What You'll Learn

In this unit, you'll cover:

  • Market Structure: How primary, secondary, auction, and dealer markets differ, plus the four "markets" (first through fourth)
  • Designated Market Makers (DMMs): The New York Stock Exchange's (NYSE) single-specialist model, their dual obligations, and how they maintain orderly markets
  • Over-the-Counter (OTC) Market Makers: How Nasdaq's competing dealer model works and the three tiers of OTC Markets
  • Types of Quotations: Firm, subject, workout, nominal, and bid/offer wanted, plus why backing away from a firm quote is a serious violation
  • The Bid-Ask Spread: How spreads work, the National Best Bid and Offer (NBBO), and why customers always get the "worse" side
  • Financial Industry Regulatory Authority (FINRA) Quotation Rules: Rules 5210, 5220, 5260, and Securities and Exchange Commission (SEC) Rules 15c2-11 and 15c2-7
  • Trading Halts and Circuit Breakers: Market-wide circuit breakers (7%, 13%, 20%) and the Limit Up-Limit Down (LULD) plan for individual securities
  • Order Tickets: Required information and time-stamping rules
  • Transaction Reporting: Trade Reporting and Compliance Engine (TRACE) for bonds, Electronic Municipal Market Access (EMMA) for munis, Trade Reporting Facility (TRF) for listed stocks traded OTC, and the consolidated tape
  • Alternative Trading Systems: Electronic Communication Networks (ECNs), dark pools, Regulation Alternative Trading System (ATS), and Regulation National Market System (NMS)
  • Best Execution: FINRA Rule 5310, the interpositioning prohibition, and payment for order flow
  • FINRA and Exchange Trading Rules: Key rules from the 6000 Series, NYSE rules, and order adjustment requirements
  • Nasdaq and NYSE Specific Rules: Market maker registration, cross transactions, block trades
  • Penny Stock Disclosures: Extra requirements for securities under $5

Why This Matters

Market making is the engine of secondary market liquidity. Every time a customer places a trade, a market maker or exchange mechanism on the other side determines the price and speed of execution. Understanding this machinery (who quotes prices, what obligations they have, and what rules prevent manipulation) is essential for any registered representative. The Series 7 regularly tests the structural differences between auction and dealer markets, the specifics of circuit breakers and LULD, and when various reporting systems apply.

Let's start with how U.S. market structure is organized.