Trading and Market Making
This chapter covers the supervision of trading activity: quoting obligations of market makers, best execution, order handling and limit-order protection, trade reporting, and rules against manipulation and insider trading.
Market Makers and Best Execution
A market maker holds itself out as willing to buy and sell a security on a continuous basis and must publish firm two-sided quotations. Under FINRA Rule 5310, a firm must use reasonable diligence to obtain the best execution for customer orders, seeking the most favorable price under prevailing market conditions. Firms must conduct regular and rigorous reviews of execution quality.
Order Handling and Limit-Order Protection
The Limit Order Display Rule and Manning rule protect customer limit orders: a firm generally may not trade ahead of a customer's limit order for its own account without executing the customer order at the same or a better price. Firms must handle marketable orders promptly and are prohibited from interpositioning a third party to the customer's detriment.
Trade Reporting
Trades in exchange-listed and OTC equity securities must be reported to the appropriate FINRA facility (such as the Trade Reporting Facility or the OTC Reporting Facility) generally within the required time after execution, so that the market receives accurate last-sale and volume information. A principal supervises the accuracy and timeliness of reporting.
Manipulation and Insider Trading
Section 9 and Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 prohibit manipulative and deceptive practices, including wash trades, matched orders, marking the close, and spreading false information. Trading on material nonpublic information violates the insider trading laws. Firms must maintain information barriers and a watch/restricted list to prevent the misuse of inside information, and a principal supervises these controls.